Latest / Merryn Talks Money / Markets Wrap: The Triple Lock, Bond Yields and Housing

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Markets Wrap: The Triple Lock, Bond Yields and Housing · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios.
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  Speaker 2: Podcasts.
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  Speaker 1: Radio. News. Welcome to the Meron Talks Money Market Wrap,
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  Speaker 1: where we talk about the biggest moves in the markets
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  Speaker 1: this week and what is driving them. I am Meron
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  Speaker 1: Somerset Webb, UK Money Editor-at-Large.
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  Speaker 2: And I'm John Stevick, Senior Reporter at Bloomberg and author
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  Speaker 2: of the Money Distilled Newsletter.
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  Speaker 1: We're not at the Labour conference, are we, John?
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  Speaker 2: No, we've been banned.
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  Speaker 1: No, we haven't. We just weren't invited. It's different.
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  Speaker 2: I think that's called shadow banning these days.
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  Speaker 1: I think I probably was invited to sit on a
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  Speaker 1: panel actually a couple of days ago and I've forgotten.
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  Speaker 1: But it's been interesting, right? It's been interesting. And we're
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  Speaker 1: going to talk about that. We're going to talk a
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  Speaker 1: little bit about the bond market. We're going to talk
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  Speaker 1: about the triple lock, the triple lock, the triple lock.
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  Speaker 1: I mean, this is a little deck chairs in the
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  Speaker 1: Titanic fiddling while Rome burns.
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  Speaker 2: Isn't it?
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  Speaker 1: All this relentless fuss about the triple lock. I mean,
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  Speaker 1: I believe and have written that the triple lock exists.
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  Speaker 1: This is about UK pensions. By the way, those of
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  Speaker 1: you who are unfortunate not to be living from another
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  Speaker 1: country and you don't know about the UK's obsession with
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  Speaker 1: our state pension and with the triple lock, the way
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  Speaker 1: in which the pension is supposed to every year go
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  Speaker 1: up by earnings, inflation, or 2.5%, whichever is the highest,
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  Speaker 1: which of course is outrageous. But our state pension was
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  Speaker 1: very low. It's up quite a lot in real terms.
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  Speaker 1: And at the same time, we have introduced an auto-enrollment system,
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  Speaker 1: which means that everybody is... in work has the beginnings
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  Speaker 1: of quite a hefty backup in a defined contribution pension.
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  Speaker 1: So that's the background. The triple lock, there is a view,
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  Speaker 1: should no longer exist because it is no longer required.
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  Speaker 1: Pensions have gone from the group that most frequently lived
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  Speaker 1: in poverty in the UK to the group who least
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  Speaker 1: frequently live in poverty in the UK. So there's a
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  Speaker 1: case for saying this is insanely expensive. Do you remember
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  Speaker 1: in the beginning, It was supposed to only cost 50
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  Speaker 1: million quid or so over however many years. Now it
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  Speaker 1: costs billions and billions and billions. So here's one of
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  Speaker 1: the big ideas from our new Prime Minister, Andy Burnham.
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  Speaker 2: This big reform to the triple lock, which has probably
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  Speaker 2: been the most headline-grabbing point that he made. What they're
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  Speaker 2: doing is this. The way the triple lock has been
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  Speaker 2: set up so far means that the state pension will
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  Speaker 2: always rise faster than average earnings over the long term.
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  Speaker 2: And so in the long term, what you're going to
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  Speaker 2: get is a position where the state pension as a
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  Speaker 2: percentage of average earnings keeps climbing. And whenever it first
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  Speaker 2: kicked off in 2011, the state pension as a percentage
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  Speaker 2: of average earnings, the state pension was still going up
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  Speaker 2: with inflation every year, but it had kind of collapsed
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  Speaker 2: to being about 10% of average earnings. Now low after
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  Speaker 2: years of the triple lock, it's back to about 25%
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  Speaker 2: or 30% depending on which average earnings figure you use.
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  Speaker 2: The point is it's back to pretty much the historic
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  Speaker 2: high And it will go towards kind of record levels
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  Speaker 2: quite soon.
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  Speaker 1: And as I say, you have the auto-enrollment as well.
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  Speaker 1: Whereas in the old days, you had the state pension
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  Speaker 1: and then some people had a DB. Public sector workers
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  Speaker 1: had a defined benefit pension. They still do, by the way.
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  Speaker 2: And a lot of private sector workers.
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  Speaker 1: Yeah, and a lot of private sector workers. But if
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  Speaker 1: you didn't have a DB, you were reliant almost entirely
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  Speaker 1: on the state pension. So there were an awful lot
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  Speaker 1: of people for whom the state pension was it, was
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  Speaker 1: all there was. In the future, assuming you've worked and
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  Speaker 1: most people will work or most people should work, assuming
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  Speaker 1: you've done that, you will have backup in the form
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  Speaker 1: of your auto-enrollment. So apart from anything else, the pensions
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  Speaker 1: landscape in the UK has changed very dramatically since the
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  Speaker 1: days when the state pension was far from adequate. And
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  Speaker 1: you could argue it's far from adequate today if you
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  Speaker 1: had to live on it alone, but But not that
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  Speaker 1: many people live on it alone.
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  Speaker 2: I hope. You don't have to live on it alone
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  Speaker 2: because the point is we've also got a welfare state
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  Speaker 2: that picks up after the people who do have to
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  Speaker 2: live on it alone. And so I think they may
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  Speaker 2: always find this slightly irritating because this constant reference to
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  Speaker 2: a group of people who live on the state pension
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  Speaker 2: just by itself. And this tends to be made by
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  Speaker 2: people who are not in that position. It's a long
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  Speaker 2: story short, it will now just go up with average earnings.
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  Speaker 2: over the long run. This is sort of being presented
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  Speaker 2: as if he's kind of scrapped it in some places.
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  Speaker 2: All he's actually done is reform it. And he's actually
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  Speaker 2: reformed it in, it might feel politically radical because it
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  Speaker 2: has been such an untouchable part of the system for
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  Speaker 2: a long time. But fiscally speaking, it is very much
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  Speaker 2: the opposite of radical. It's going to save a little
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  Speaker 2: bit of money. And the key thing is, The way
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  Speaker 2: he's trying to sell this to the population and to
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  Speaker 2: pensioners as a whole is by saying that there's also
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  Speaker 2: going to be some form of taxpayer-funded social care. Because
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  Speaker 2: another big issue in Britain, or certainly in England and Wales,
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  Speaker 2: I know there's different systems elsewhere, is that if you
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  Speaker 2: get dementia and you have to go into a care home,
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  Speaker 2: then there's all kinds of worries about how much of
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  Speaker 2: your asset base that takes up in terms of paying
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  Speaker 2: for it. And there's this vague sense we're going to
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  Speaker 2: set up some kind of social care NHS. But the
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  Speaker 2: word NHS is a clue there, which means it's going
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  Speaker 2: to be a bottomless pit of money. And reforming the
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  Speaker 2: triple lock on the state pension will not raise a
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  Speaker 2: bottomless pit of money. It will save, relative to the
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  Speaker 2: original trajectory, some billions, but not many.
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  Speaker 1: I'm going to pull out a positive here. You ready?
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  Speaker 2: Oh, don't.
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  Speaker 1: OK, so let's say that the introduction of the idea
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  Speaker 1: that there will be, and apparently this is a passion
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  Speaker 1: of Andy Burnham's, he has long, his whole life wanted
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  Speaker 1: to do something about having a national social care, something
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  Speaker 1: or the other. Let's say that he follows through with this,
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  Speaker 1: has an election, wins an election, and she does some
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  Speaker 1: of the things he says he's going to do. In
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  Speaker 1: order to finance that, you would have to have a
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  Speaker 1: new broad base of tax. And one of the problems
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  Speaker 1: that you and I talk about on this podcast a lot,
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  Speaker 1: is there's a lot of talk in the UK about
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  Speaker 1: tax the wealthy more, tax the wealthy more, tax the rich,
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  Speaker 1: tax the rich. But the rich already pay a disproportionate
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  Speaker 1: amount of most taxes in the UK relative to other
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  Speaker 1: developed countries. We're really bad at taxing across the board.
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  Speaker 1: So maybe this is a suggestion that can begin to
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  Speaker 1: change that dynamic. If we're going to have another national
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  Speaker 1: something service, it has to be one that everyone contributes to.
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  Speaker 1: And therefore, we can take a step back from constantly
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  Speaker 1: loading tax after tax after tax after tax on the
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  Speaker 1: small group of people we believe to be the wealthy
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  Speaker 1: or the rich and watching them hoist their bags onto
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  Speaker 1: their broad shoulders and get on a plane to leave
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  Speaker 1: the UK. I mean, that may.
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  Speaker 2: Be the case. I think the question you then have
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  Speaker 2: to ask is, why is Andy Burnham going to be
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  Speaker 2: in a position to achieve this politically? when it has
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  Speaker 2: kind of crashed and burned the careers of various prime
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  Speaker 2: ministers beforehand this is not the first time this issue
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  Speaker 2: has come up and to be fair when Burnham talks
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  Speaker 2: about wanting to have done it for a long time
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  Speaker 2: I think it was the last thing he worked on
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  Speaker 2: before the new Labour government kind of obviously got voted
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  Speaker 2: out in 2010 this has been going on for ages
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  Speaker 2: but it kind of it killed off Theresa May because
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  Speaker 2: her kind of solution to it was kind of described
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  Speaker 2: as a dementia tax even a low it would have
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  Speaker 2: left everyone with £ 100, 000 of their asset base intact. Boris
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  Speaker 2: Johnson kind of nodded to it with the national insurance
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  Speaker 2: add-on that wasn't national insurance, it was called the social
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  Speaker 2: care contribution or whatever. And none of these things has
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  Speaker 2: worked so far. And I think it is something we
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  Speaker 2: need to fix. I still don't really understand why we
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  Speaker 2: can't have an insurance market for it, somehow make that work.
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  Speaker 2: I don't know if it's because the costs are too
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  Speaker 2: high to insure against, if it's a bit like But
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  Speaker 2: even critical illness cover has taken off. So I'm sure
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  Speaker 2: there must be a way to eventually get an insurance
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  Speaker 2: market to work. But barring that, I don't know what
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  Speaker 2: you do.
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  Speaker 1: All right. So at this point, you've done anything. In fact,
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  Speaker 1: you didn't do anything to particularly calm the bond markets.
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  Speaker 1: No one got particularly upset, but no one was particularly
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  Speaker 1: impressed either. Was there anything in Burnham's speech that made
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  Speaker 1: you go, oh, my goodness, yes, I'm going to rush
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  Speaker 1: out and buy those gilts?
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  Speaker 2: Simon White, our colleague, put out a piece very quickly there.
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  Speaker 2: And the truth is the bond markets are not especially
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  Speaker 2: worried about gilts at the moment relative to the premium
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  Speaker 2: they've demanded in the fairly recent past. And now you
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  Speaker 2: can say that's because they approve it, Andy Burnham. I
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  Speaker 2: think it's probably more likely because their attention is being
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  Speaker 2: distracted by France at the moment. It's amazing how sometimes
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  Speaker 2: you just get in the spotlight and then the spotlight
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  Speaker 2: is taken away from you and that can help. But
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  Speaker 2: at the moment, I think, obviously there are big forces
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  Speaker 2: pushing up bond yields everywhere, and that includes the US,
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  Speaker 2: leads everyone. Inflation, there are lots of issues with Britain,
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  Speaker 2: but none of them have got particularly worse. So I
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  Speaker 2: think at the moment, nobody's overtly worrying about Britain relative
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  Speaker 2: to other countries. But obviously we've got the budget coming up.
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  Speaker 2: They can't relax over that. And it's still not very
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  Speaker 2: clear how they're going to fund all of these ambitions
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  Speaker 2: that they've got. And it's still not entirely clear either
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  Speaker 2: to me that they're not going to go for some
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  Speaker 2: sort of earlier election to get the sign off and
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  Speaker 2: all that. Because the other thing about the speech is
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  Speaker 2: he kept talking about 2030. So that's after the next election.
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  Speaker 2: So again, he's sort of saying, this is what I
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  Speaker 2: want to do, but I can't do it just now
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  Speaker 2: because the current manifesto has tied my hands. And the
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  Speaker 2: obvious solution to that is, right, we'll get rid of
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  Speaker 2: the current manifesto by.
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  Speaker 1: Having an election. An election.
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  Speaker 2: And I'm still not convinced that despite his denials, that's
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  Speaker 2: not what he's going to end up doing.
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  Speaker 1: And if there was an election, it would have to
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  Speaker 1: be quite soon if he wanted to get started in
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  Speaker 1: any of these things.
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  Speaker 2: Yeah, you would think if that's what they decide to do,
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  Speaker 2: it's kind of got to be 2027. I don't see
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  Speaker 2: why he would leave it till later than that. But
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  Speaker 2: we'll see.
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  Speaker 1: Trying to think of something else optimistic to say about
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  Speaker 1: the spew.
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  Speaker 2: I mean, honestly, I mean, the gilts. There are a
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  Speaker 2: lot of people, quite clever people, now saying that bonds
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  Speaker 2: generally are attractive enough to be worth putting some money into.
• 10:39
  Speaker 2: Jim Bianco, who's a US commentator, but somebody who's very
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  Speaker 2: kind of downbeat on bonds this week, tweeted out that
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  Speaker 2: he was, you know, he thought Treasury's offered a big
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  Speaker 2: enough yield here to stick money in, and it was
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  Speaker 2: like a nice cushion. Obviously, the US is very different.
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  Speaker 1: Yeah, but he's talking about treasury yields. He's not diving
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  Speaker 1: into France, is he?
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  Speaker 2: No, no, I don't think anyone's particularly diving into France.
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  Speaker 2: I do think France stands out. And to be fair,
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  Speaker 2: it is the politics there. And I think that's why
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  Speaker 2: we can't relax here, because we may have this brief
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  Speaker 2: period where markets have decided that The Burnham government isn't
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  Speaker 2: going to rock the boat, but there are still lots
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  Speaker 2: of wild cards and all the rest of it that
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  Speaker 2: could come out. And at some point, we're going to
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  Speaker 2: have to marry up this gap between the political ambitions
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  Speaker 2: and the actual money in the bank that we've got.
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  Speaker 2: And I don't really see how those two can't be
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  Speaker 2: married up without some sort of collision with either taxpayers
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  Speaker 2: or the bond markets. But at the moment, we're not
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  Speaker 2: in the spotlight. Whereas France, obviously, they've got two people
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  Speaker 2: who are going to win the presidency next year. And
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  Speaker 2: one of them has said he's going to burn the
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  Speaker 2: load at French ponds. And the other one has sort
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  Speaker 2: of expressed some concern about the fiscal situation, but also
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  Speaker 2: wants to lower the pension age from its already ridiculously
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  Speaker 2: low French level. So you can see why everyone's a
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  Speaker 2: bit more worried about France than they are anywhere else.
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  Speaker 1: Yeah, but I think the same thing holds for all
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  Speaker 1: of these countries, which is that Bond yields won't fix
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  Speaker 1: themselves until politics is fixed. Yeah. And we've got rubbish politics.
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  Speaker 1: Every country suffering from high bond yields that are not
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  Speaker 1: related to great economic growth suffers from horrible politics and
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  Speaker 1: politicians that will not confront their fiscal problems. So you're
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  Speaker 1: not going to see a proper turnaround until you see
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  Speaker 1: either superbly fast growth across Europe, not holding my breath,
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  Speaker 1: or politicians who will genuinely confront their problems. And one
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  Speaker 1: of the things that Andy Burnham keeps saying is that
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  Speaker 1: he will make difficult decisions. But so far, as I
• 12:44
  Speaker 1: say in the speech, all I heard was not, I
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  Speaker 1: will make difficult decisions, but I will make some decisions
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  Speaker 1: at another time, which is different.
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  Speaker 2: I should make all these decisions in 2030. Yeah.
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  Speaker 1: Okay, John, the other thing that I find it hard
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  Speaker 1: to feel optimistic about is the housing market. Obviously, things
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  Speaker 1: are pretty bad in the housing market. We hear endlessly
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  Speaker 1: from people who can't sell their houses that the price
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  Speaker 1: they bought it for, let alone anything more and prices
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  Speaker 1: have been cut and cut again. And the statistics tell
• 13:19
  Speaker 1: us that volumes are falling, that prices are falling. And
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  Speaker 1: into this comes the something must be done group who
• 13:27
  Speaker 1: are putting in place another help to buy system. Now,
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  Speaker 1: last time I felt it was an absolute disaster. I
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  Speaker 1: think you agreed with me. What makes this time different?
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  Speaker 2: Well, nothing. I think it's just something that's easy to do.
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  Speaker 2: So they're launching something called Your First Home, which is
• 13:44
  Speaker 2: just to help to buy again. And we've not got
• 13:46
  Speaker 2: the full details yet. They'll come out in the budget.
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  Speaker 2: But the idea is you can have a 2.5% deposit
• 13:52
  Speaker 2: and the taxpayer will back it up with a 20%
• 13:55
  Speaker 2: equity loan. So basically you can buy a house with
• 13:59
  Speaker 2: a 22.5% deposit and that means you can access probably
• 14:02
  Speaker 2: a cheaper mortgage, but also... I guess probably more importantly
• 14:07
  Speaker 2: from the government's point of view, it might incentivise the
• 14:09
  Speaker 2: builders to actually start building some more flats. Or at
• 14:13
  Speaker 2: least they hope that will happen. It's not really convincing
• 14:17
  Speaker 2: given the backdrop, I must admit. But it's basically very
• 14:20
  Speaker 2: similar to the last one. And that's also why it's
• 14:23
  Speaker 2: worrying because if you look at the statistics, they've actually
• 14:27
  Speaker 2: got quite a lot of quite specific statistics for the
• 14:30
  Speaker 2: numbers on Help to Buy. And of the flats, specifically flats,
• 14:36
  Speaker 2: flats are the ones that lose money. The houses have
• 14:38
  Speaker 2: actually not been too bad. But the flats, roughly, I
• 14:42
  Speaker 2: think 45% of the ones that were sold in 2024,
• 14:46
  Speaker 2: 2025 fiscal year, lost money on their original purchase price.
• 14:52
  Speaker 1: But you automatically lose money on your original purchase price.
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  Speaker 2: Exactly.
• 14:56
  Speaker 1: The only way you can make money on a new
• 14:58
  Speaker 1: build is in an absolutely storming build market. Because the
• 15:03
  Speaker 1: second you buy a new flat, it becomes a secondhand flat.
• 15:06
  Speaker 1: And I don't know if their numbers have been updated,
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  Speaker 1: but last time around, the number was 16% on average.
• 15:12
  Speaker 1: The second you pick up those keys, turn the keys
• 15:15
  Speaker 1: in the door. you have lost 16% of the money
• 15:18
  Speaker 1: that you paid for that apartment or that house. That's
• 15:22
  Speaker 1: just how it is. So unless there's a massive bull market,
• 15:26
  Speaker 1: you buy, you lose.
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  Speaker 2: Yeah, and I mean, I think this is the problem.
• 15:30
  Speaker 2: Because obviously, if you sell at a loss whenever you
• 15:33
  Speaker 2: only had a 2.5% deposit in the first place, we're
• 15:37
  Speaker 2: not right. If you've been in there for a couple
• 15:38
  Speaker 2: of years, it may have grown a bit. It's not
• 15:40
  Speaker 2: going to be enough to offset thousands of pounds of loss.
• 15:44
  Speaker 2: So you are trapped. Yeah, especially the ones that bought
• 15:48
  Speaker 2: in the 2020s are now looking at negative equity. And
• 15:51
  Speaker 2: that does mean that you're stuck, particularly if you haven't
• 15:54
  Speaker 2: paid off the loan. Because the other issue with the
• 15:57
  Speaker 2: equity loan is obviously if you sell, you're going to
• 15:59
  Speaker 2: have to repay the government. There's a couple of really
• 16:03
  Speaker 2: sticky things there. For a start, you have to get
• 16:05
  Speaker 2: an independent valuation from BRICS. Nothing wrong with that, but
• 16:08
  Speaker 2: it only lasts for three months. Now, if you look
• 16:10
  Speaker 2: at how long sales are taking at the moment, I
• 16:13
  Speaker 2: can see you easily having to go back for another
• 16:15
  Speaker 2: two valuations before you actually get rid of the house.
• 16:19
  Speaker 2: And another kind of problem is that the valuation is
• 16:24
  Speaker 2: then what the equity loan demands back. So if it
• 16:28
  Speaker 2: gets valued at, say, £ 300, 000, but you sell for £ 280, 000,
• 16:32
  Speaker 2: you are still going to have to pay back your
• 16:36
  Speaker 2: equity loan based on the £ 300, 000 valuation price.
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  Speaker 1: No, no. Yep, yep.
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  Speaker 2: It's pretty bad, isn't it? So you could end up
• 16:44
  Speaker 2: having to pay the government more than the percentage of
• 16:48
  Speaker 2: the actual sales price because it's based on the valuation.
• 16:53
  Speaker 2: So no, I think it would be, it's not a
• 16:56
  Speaker 2: great deal at any time, but you're in a rampant
• 16:58
  Speaker 2: bull market for property. Like the reason the 2013 one
• 17:02
  Speaker 2: wasn't so bad is because mortgage finance was really tight,
• 17:05
  Speaker 2: probably too tight following the financial crisis. And also not
• 17:10
  Speaker 2: much stuff was getting built, but it was a lot
• 17:12
  Speaker 2: of pent up, you know, pent up demand is a
• 17:15
  Speaker 2: terrible word, but you know, the builders were going to
• 17:18
  Speaker 2: build stuff. And there was, their balance sheets were looking
• 17:22
  Speaker 2: better and all that sort of stuff. Whereas now we're
• 17:25
  Speaker 2: kind of like at the tail end, you know, or
• 17:29
  Speaker 2: actually we're quite, quite the way into a real terms correction.
• 17:34
  Speaker 2: And it's hard to see why anyone would buy into
• 17:38
  Speaker 2: this market. And B, why anyone would still want to
• 17:42
  Speaker 2: build into this market? I mean, as far as the
• 17:46
  Speaker 2: house building stocks go, I do think they've fallen a lot.
• 17:49
  Speaker 1: Oh, they liked it.
• 17:49
  Speaker 2: They like it. And I think it is a catalyst.
• 17:52
  Speaker 2: I think it also shows that they're politically favoured still.
• 17:55
  Speaker 1: Oh, to be in a politically favoured group. Would you
• 17:57
  Speaker 1: like to be in a politically favoured group, John?
• 17:59
  Speaker 2: That'd be nice.
• 17:59
  Speaker 1: Marvellous.
• 18:00
  Speaker 2: I love that.
• 18:00
  Speaker 1: I think we'd better leave it there. We had better
• 18:03
  Speaker 1: leave it there. Thanks for listening to this week's Merrin
• 18:10
  Speaker 1: Talks Money Markets Wrap. If you like our show, rate, review,
• 18:13
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• 18:15
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• 18:17
  Speaker 1: MerrinSW and John underscore Steffek. This episode was produced by
• 18:21
  Speaker 1: Summer Saadi and Moses Andam. Questions and comments on the
• 18:23
  Speaker 1: show and all our shows are always welcome. Our show
• 18:26
  Speaker 1: email is merrinmoney at bloomberg.net.