When discussing mortgage rates and prices, we often talk about ‘economic conditions’ – but what exactly do we mean by that? Michelle Niziol offers an easy-to-understand explanation of how politics and finance affect your home and how much you pay for it
The house you live in is more than just bricks; it represents stability, security and a place to build a life.
But for many, acquiring that dream home and navigating the ever-changing economic environment can feel like walking a tightrope.
Recessions caused by shockwaves in global markets are causing ripple effects in virtually every aspect of our lives, from the housing crisis of 2008, the pandemic that began in 2020 and now. interest rates rise and the cost of living crisis.
How the recession and cost of living crisis are affecting homeowners and buyers
When economic activity slows, companies cut back, leading to unemployment and a decline in disposable income. This has a direct and significant impact on the housing market.
People who are hesitant about job security are less likely to take out loans against homes, as this is a major commitment if 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 losses may fall behind on their mortgage payments. If things get really bad, the bank can foreclose on the house.
A sharp increase in home repossessions further increases housing supply, putting downward pressure on prices. This creates a vicious cycle: Falling prices reduce homeowners’ equity, making it harder to refinance mortgages and potentially leading to more foreclosures.
So are we currently in a recession? We started it at the end of 2023: UK GDP rose 0.1% in February thanks to improvements in the services and manufacturing sectors, according to data from the Office for National Statistics – so there is hope that the situation will return to a semblance of ‘normal’. ‘ in the near future.
Interest rates – how they affect the housing market
Imagine a seesaw: affordability on one side and house prices on the other. Now imagine the interest rate as the lever that controls equilibrium.
Lower interest rates make mortgages cheaper. This translates into lower monthly payments, which means… home ownership a more realistic dream for many. Now that more people can afford a house, demand increases, which increases the ‘affordability’ of the seesaw.
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, causing prices to become disconnected from underlying economic reality.
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 try to influence the housing market through various policy measures, such as offering tax breaks for first-time buyers. These breaks can make upfront costs like deposits less intimidating, encouraging people to enter the market sooner. This is especially helpful for young adults looking to establish themselves financially, which is a very welcome and much-needed helping hand for many in this market.
But government intervention is a double-edged sword. While this policy may help some, it can also drive up prices, making it harder for those who don’t qualify for the breaks to compete.
Also, an overly ‘hot’ market, fueled by incentives, can become unsustainable.
The bigger picture: supply and demand
So far we have focused on the demand side of the housing market. But there is another crucial player: supply.
The number of available homes has a major influence on affordability. A lack of new construction, even in a strong economy, can limit affordability.
Imagine a limited number of seats at a concert: the more people competing for those seats, the higher the price becomes.
An example of this is when Parliament passed the Housing Act 1980, which gave five million social housing tenants in England and Wales the right to buy their home from their local authority. Councils have since failed to quickly build new homes to meet the people who need them, creating a supply-and-demand problem.
Regulation – a cure or a curse?
The government doesn’t just hand out tax breaks; it also sets rules for lending practices and development. These regulations may impact affordability and market stability.
For example, stricter lending standards after the 2008 financial crisis helped prevent risky lending practices but also made it more difficult for some qualified buyers to obtain mortgages.
Stay well informed
The relationship between the economy and the housing market is complex. By understanding how factors like recessions, interest rates, and government policies interact with supply and demand, we can be better informed
Michelle Niziol
decisions about our homeownership.
Whether you have a First buyer navigating the complexities of mortgages or a seasoned homeowner looking to upgrade, staying informed about the economic climate can allow you to make good choices and realize your dream of a stable and safe place to live.
Michelle Niziol is director and owner of IMS Real Estate Group