By Nitesh Patel, Strategic Economist at Accord Mortgages
Bill Clinton’s successful presidential campaign strategist, James Carville, once famously attempted to motivate his team by saying, “It’s the economy, stupid.”
While the phrasing used is somewhat lacking in tact and diplomacy, his point is as clear as it is blunt: in an increasingly interlinked world, like politics, macroeconomics affects every aspect of our lives.
Why is economics important to the mortgage market?
For brokers, this is particularly important. The economy and the housing market – and therefore the mortgage market – are inextricably interlinked. The key drivers of the economy such as employment, incomes and earnings, are the same key drivers for the housing market. This means that paying close attention to the wider UK economy, as well as the housing and mortgage markets, is important in helping you to engage and advise clients and to plan and run your business.
Most obviously, economic health and confidence strongly influence interest and swap rates, which directly affect mortgage rates, affordability and therefore borrowing and loan size. Currently, there is a view in financial markets that a strong surge in consumer spending and constraints in housing supply could push up inflation and force the Bank of England to raise rates. This has had the impact of raising market rates.
There are also less perceptible influences. In times of economic boom, high employment and rising incomes, demand for home-ownership accelerates and house prices typically rise. When house prices rise, data shows consumers feel richer and more inclined to spend across the economy as a whole – as well as being more likely to try and sell their home.
Buying a home also creates demand for other consumer products and services, from soft furnishings to DIY products and building work, which boosts the wider economy.
The reverse is also true – an economic downturn can cause people to postpone plans to buy a home and delay plans to improve or renovate. If fewer people are buying new homes, the demand for home products and services falls. Potential vendors may be discouraged from putting their home on the market if house prices are static or in decline.
The economic impact of Covid-19
As with everything, there are always exceptions to the rule. The current housing market has been on a strong upward trajectory since the middle of 2020, when it reopened following the first lockdown, despite an economy in decline.
In the six months up to March, there were 567,000 mortgage approvals for house purchases, 43% higher than for the same period to March 2020. This is despite the overall economy shrinking by almost 10% in 2020 and GDP barely switching back to positive growth in March. House prices have reached highs not seen since before the 2007 crash.
So why has the housing market seemingly defied economic logic? Simply put, the Government has protected incomes through its furlough scheme and injected life back into a stagnant market with its initial stamp duty holiday. This has increased confidence, enabling the market to release pent up demand and gain momentum.
The market has been propelled by homeowners’ desires for larger properties, with detached property prices rising by 12%, compared with just 5% for flats. This demonstrates why we shouldn’t zone in on just one metric, like house prices, and should instead look at figures across the wider economic landscape to give a full picture of what’s going on.
The economic measures brokers should keep an eye on
Paying attention to data across the spectrum can help you to interpret market highs and lows to enable you to prepare for busy and leaner times, ensure you can keep up with client demand and anticipate your clients’ needs.
As well as giving useful insight into your own business, it can help you to enhance the advice you give to clients by providing useful context to aid decision making. Following and understanding economic trends can also help with wider business planning, including recruitment, marketing and financial forecasting.
The key sets of data that are most helpful to brokers are:
The Bank of England’s mortgage approval data, which can be found in the Bank’s monthly Money & Credit report. This will give you a view of market activity by both volume and value, which gives an indication of demand for the number of mortgages and the size of loans. The data is split into house purchase and remortgage which will help brokers to understand what’s driving the market.
The Office of National Statistics’ (ONS) house price index, which is published monthly and gives an indication of the housing market’s overall health. Particularly useful for brokers are the regional breakdowns, which show the geographic hot spots and help you to understand how your local market is doing. Although there are a number of other house price indices, the ONS’s is the most accurate, as it’s based on the full market sold value, rather than indicative data based on lending to a section of the market. Rising house prices might also indicate when homeowners may want to remortgage, either to gain a more favourable rate because of a lower loan-to-value or to borrow more against their property.
Monthly and annual employment and income data, again from the ONS, is a key indicator of both economic health and confidence. Gross Domestic Product figures, also an ONS output, are also useful in this context.
Consumers are more likely to spend and borrow during times of high employment and wage growth. This is particularly true of bigger ticket items, including housing, and could also indicate when homeowners are more likely to want additional lending for improvements and extensions.
The Bank of England interest rate is a key influence on swap rates, which determine mortgage rates, so keeping track of this is useful in anticipating future trends in mortgage rates.
It’s also worth keeping an eye on softer market data, including trends from the major estate agent websites, Zoopla and Rightmove, as they can give indications of wider trends, such as the number and types of properties that are coming to market and can also help to understand demand months ahead of mortgage lending data being published.
However, it is worth remembering that besides economic data there are other drivers that don’t get routinely measured by the ONS, such as personal happiness and changes in lifestyle, which is playing a key role in today’s market. With homeowners spending more time at home they are now seeking larger homes with more space and bigger gardens, or in less densely populated areas.
It's also wise to keep an eye on Government announcements and commentary on the housing market – it has been a very topical issue in politics for a long time. In the past four decades, political interventions have shaped the market: from Margaret Thatcher’s sale of social housing to tenants in the 1980s, to Gordon Brown’s stamp duty holiday in 2008 and David Cameron’s 2015 introduction of a raft of measures aimed at assisting first-time buyers.
Paying attention to these trends and interventions will help you to stay one step ahead of the competition and put yourself in a good position to anticipate what could be coming down the road. Focusing on economics worked for Clinton and it could do wonders for your client engagement and business planning too.
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Accord Mortgages Limited is authorised and regulated by the Financial Conduct Authority. Accord Mortgages Limited is entered in the Financial Services Register under registration number 305936. Buy to Let mortgages for business purposes are not regulated by the Financial Conduct Authority. Accord Mortgages Limited is registered in England No: 2139881. Registered Office: Yorkshire House, Yorkshire Drive, Bradford BD5 8LJ. Accord Mortgages is a registered Trade Mark of Accord Mortgages Limited.
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