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A Sunny Economic Outlook…Or Will The Housing Market Whip Up A Storm?


Over the past few months, since I made a few forecasts last summer and certainly until the last few days as I write in mid-May, it’s been unrelenting good news – the economy has recovered from an unprecedented SIX-YEAR slump, unemployment  is dropping, house prices are up (in the South-East anyway) and business confidence is on the up.

There are even numbers to back up everyone’s increased confidence; some numbers (you know you love them):

  • The CBI has revised its economic growth estimate for 2014 upwards from 2.6% to 3% – going through a significant psychological barrier in the process – and the forecast is continuing growth at 2.7% (estimate up from 2.5%) for 2015.
  • By April, unemployment had fallen to 6.8% (another psychological barrier crossed) from 7.8% a year ago.
  • At the time of writing, inflation is running at 1.8% which is nicely within the Bank of England’s target level of 2%.

In terms of the retail world in which many of you reading this are operating, key performance indicators include:

  • Overall retail sales (according to the British Retail Consortium) for April are, year-on-year, up by 5.7% on overall sales, and 4.2% “like for like” (shops that were open both last year and this) – although the timing of Easter can distort these figures: nonetheless, they’re healthy!
  • Non-food sales, over the three months to the end of March were up a whopping 7.2% per annum which represents the biggest growth since 2004 near the height of the last economic boom.*
  • I think this statistic may be good news for the high street – internet sales, one of the historic changes in shopping habits I flagged last summer, are up by a surprisingly modest 7.1% in March and compared to last year and represent an again surprisingly modest 10.6% of totasl retail sales (some forecasts have had it increasing to 20% plus by 2018).*
  •  Also, maybe more good news for the high street – non-store sales (that’s pure internet/mail order) have slowed to 12.9%.*

* Source – GVA Retail Update, April 2014.

I could go on, but you get the picture.

Looking good? Apparently so, judging by those numbers…..but…..you all read the papers:

The Bank of England base rate, which sets the benchmark for interest on all saving and – more pertinently for those of us with mortgages – borrowing, has remained at an all-time (and, some might argue, artificial) low of 0.5% for more than five years. Mark Carney, the newish Governor of the Bank, indicated in his statement last week that the base rate would remain at this level for the time being, but don’t expect it to stay that low for very long.

Everyone’s best guess, mine included, on hearing Mr Carney’s statement was – last week – that the critical number would start to move left of the decimal point next year, around April time, which would present us with the very interesting scenario of interest rates nudging upwards just as the main parties are in the thick of those crucial last few weeks of campaigning before the General  Election. I wondered when reading the press reaction to Mr Carney’s statement whether, that evening,  David Cameron sipped his swan’s blood (with thanks to the writers of the much-missed “The Thick Of It” for THAT delightful bit of imagery), gazed at the sun setting over Downing Street and pondered the ramifications of the 2011 Fixed-Term Parliaments Act he signed up to which in practical terms prevents him from going to the country a bit earlier than May ‘15.

I digress.

Demonstrating that a week really is an awful long time in politics (and economics) there has since the weekend before I wrote this been grave concern expressed publicly  – including by Mark Carney – that rapidly growing property prices, especially in London , where (despite a very modest dip in March) inflation in house prices is running at an eye-watering 17% year-on-year, could prove to be a very serious – some say  the biggest – threat to the economy.

Aside from tinkering or even abandoning the divisive Help to Buy scheme (see below),  and making mortgages harder (or even harder) to obtain by means of lenders imposing stringent affordability tests, guess what could be lurking round the corner?

You guessed – interest rate increases, very likely a bit earlier than next April, and perhaps by more than the odd half a percentage point.

So what happens then?

Interest rates moving  back towards historically more “normal” levels will  see people with less cash in their pockets as their mortgages go up, and salary inflation does not keep pace; those with fixed rate mortgages coming to an end in the next couple of years will have a particularly nasty shock; the private rented housing sector may acquire a captive audience prey to rapacious landlords; the “feelgood factor” of theoretically large property equity erodes (although, as I constantly tell people, property equity isn’t real, disposable, money).

So, again put simply, people cut back – they spend less, in the high street, online, on holidays, on new cars, the manufacturing industry contracts, unemployment rises…..and, ultimately,  the economy dips again.

Can we avoid losing all the economic ground that’s been gained in the past year? I’m no economist (as you may have already worked out) but setting aside the myriad permutations for a change in the political landscape this time next year, and on the assumption that on known economic factors we’ll most likely stand or fall on the state of the housing market,  I  think we can.

Measures could include:

A recognition that the housing market situation in London needs particular and perhaps “tailor-made” attention rather than the imposition of a one size fits all” national solution.

The Help to Buy scheme should be reviewed downwards (from a £600,000 maximum to £400,000 or lower) and help the people it’s intended to –  or indeed scrapped altogether.

Mortgage lending needs to be sensibly regulated. I see in the press that Lloyds Bank have announced a cap of borrowing; hand in hand with this, the lenders must ensure that prospective borrowers are properly counselled in terms of the potential impact of interest rate rises.

More housing needs to be built – one of the issues with the property market is the lack of “stock”.

I never thought, as someone who’s spent most of my career working for landlords, that I’d ever write this but rent control on private housing stock could also come into the equation.

But, as always, the above is just my “take” on things – what do you, as business people, think???

Email me on [email protected]


About Jonathan Browne (13 Articles)
Libertarian, gourmand, Villa fan, guitar player, bar stool philosopher and mensch; I also know a bit about about buildings and businesses; and businesses in buildings