When discussing mortgage rates and prices we often talk about ‘economic conditions’ – but what exactly do we mean by this? Michelle Niziol offers an easy-to-understand explanation of how politics and finance impacts your home and how much you pay for it
The house you live in is more than just bricks and mortar – it represents stability, security, and a place to build a life.
But for many, obtaining that dream home and navigating the ever-changing economic environment can feel like negotiating a tightrope walk.
Recessions created by shockwaves to the world markets cause ripple effects in just about every aspect of our lives, from the 2008 housing crash, the pandemic starting in 2020 and now interest rates soaring and the cost-of-living crisis.
How recession and the cost-of-living crisis impact homeowners and buyers
When economic activity slows down, businesses cut back, leading to unemployment and a decline in disposable income. This has a direct and significant impact on the housing market.
People hesitant about job security are less likely to take on loans against houses as it’s a big commitment when you are in a precarious job market. This drop in demand can lead to stagnant or even falling house prices.
The story doesn’t end there, during recessions, some homeowners struggling with job loss might fall behind on their mortgage payments, if things get really bad, the bank can repossess the house.
A surge in house repossessions further increases housing supply, putting downward pressure on prices. This creates a vicious cycle – falling prices reduce homeowner equity, making it harder to refinance mortgages and potentially leading to more foreclosures.
So, are we currently in a recession? We entered into one at the end of 2023, UK GDP rose 0.1% in February thanks to improvement in the services and production sectors, according to data from the Office for National Statistics – so there is hope of things returning to a semblance of ‘normal’ in the near future.
Interest rates – how they impact the housing market
Imagine a seesaw – on one end sits affordability, and on the other, housing prices. Now, imagine interest rates as the lever that controls the balance.
Lower interest rates make mortgages cheaper. This translates to lower monthly payments, making homeownership a more realistic dream for many. With more people able to afford houses, demand rises, pushing the ‘affordability’ end of the seesaw up.
However, the seesaw can tilt too far. Very low interest rates, while tempting in the short term, can also lead to risky lending practices by banks. This can inflate housing bubbles, where prices become uncoupled from underlying economic realities.
These bubbles eventually burst, leading to market crashes that can wipe out years of savings for unsuspecting buyers.
What influence does the government have?
Governments can attempt to influence the housing market through various policies like offering tax breaks for first-time buyers. These breaks can make upfront costs like deposits less daunting, encouraging people to enter the market sooner. This is particularly helpful for young adults trying to establish themselves financially, which in this market, is a very welcome and much-needed helping hand for many.
But government intervention is a double-edged sword. While these policies can help some, they can also push up prices, making it harder for those who don’t qualify for the breaks to compete.
Also, an overly ‘hot’ market fuelled by incentives can become unsustainable.
The bigger picture – supply and demand
So far, we’ve focused on the demand side of the housing market equation. But there’s another crucial player – supply.
The number of available houses significantly impacts affordability. A lack of new construction, even in a strong economy, can limit affordability.
Imagine a limited number of chairs at a concert – the more people vying for those seats, the higher the price gets.
An example of this is when Parliament passed The Housing Act 1980 that gave five million council house tenants in England and Wales the Right to Buy their house from their local authority. Councils have since been unable to build new homes at speed to cater for people who need them causing a supply and demand problem.
Regulation – a cure or a curse?
The government doesn’t just hand out tax breaks; it also sets regulations on lending practices and development. These regulations can impact affordability and market stability.
For instance, stricter lending standards after the 2008 financial crisis helped prevent risky lending practices but also made it harder for some qualified buyers to secure mortgages.
Stay well informed
The relationship between the economy and the housing market is a complex one. By understanding how factors like recessions, interest rates, and government policies interact with supply and demand, we can make more informed
Michelle Niziol
decisions about our homeownership journey.
Whether you’re a first-time buyer navigating the intricacies of mortgages or a seasoned homeowner looking to upgrade, staying informed about the economic climate can empower you to make sound choices and achieve your dream of a stable and secure place to call home.
Michelle Niziol is director and owner of IMS Property Group
