Richard Northedge examines the wider economy, including interest rates and government policy, and considers the potential impact on the mortgage industry – whether the Chancellor extends the Stamp Duty holiday or not.
While economists talk of V or W-shaped recoveries, the housing market looks set to have fallen, soared higher than ever, now be facing a slump and, at some point, a weak recovery.
In such a volatile market, if there is a new normal, how will we recognise it when it arrives?
Mortgage advisers also have other factors to incorporate into their forecasts for 2021:
- the impact of Brexit
- the success of vaccination programme
- the end of furlough schemes and rise in unemployment
- public-spending cuts and tax rises, and
- what happens when mortgage holidays end.
Will house prices rise or fall?
House prices are widely expected to fall after the March cliff edge – when the Stamp Duty Holiday ends – and not expected to recover at best until 2022 and at worse, 2027.
Besides cutting interest rates, the Bank of England increased its quantitative easing programme last year. A similar monetary policy combination implemented after the 2008 financial crisis translated into a wider surge in asset prices – commercial property boomed alongside housing.
This time, however, office and shop values have reflected the recession in business while residential property has overheated. That disconnect seems unsustainable.
How unemployment dents consumer confidence
This will be a bad year economically, but any outcome less bad than expected will be regarded as good. The key is not that the glass contains 50% of its capacity but whether the tumbler is being topped up or drained. Half-full and falling is worse than half-empty and filling.
Unemployment, for instance, will undoubtedly be far higher in 2021 than a year ago – although the Office for Budget Responsibility’s 7% forecast published in November 2020 is lower than most previous predictions.
But it is not the extra 3% of unemployment that will drag down the economy – the damage is done by people who fear landing in that 3%. They cut back their spending and put house-buying plans on hold.
Once it’s clear that unemployment has plateaued – better still, started to decline – that wider group regains confidence and resumes consumption.
Interest rates and the economic mood
Since furloughing and other schemes are disguising the true level of unemployment, lenders can only speculate on how high the rate may rise and when it may turn.
The Nationwide’s worst scenario is 14% early this year but its best possibility is a peak below 6% even sooner and, in that case, house prices don’t dip at all.
Will would-be buyers who miss March’s stamp duty deadline – unable to find a property or unable to complete the deal in time – shrug off their misfortune and resume their goal without the pressure of a frenzied market?
After all, workers prevented from spending during the lockdowns increased their savings. And those without jobs won’t be buying. Or will the would-be buyers dejectedly withdraw while watching house prices fall?
How consumer confidence impacts the economy
The difference between optimism and pessimism is a fine line, but one that points to the direction of our economic future. Each state is self-fulfilling.
The mood is dictated by small factors. The collapse of a well known brand can affect consumer confidence more than national unemployment statistics. Setbacks on a vaccine could count more than increased inflation. And an unpopular tax more than cancels out an increased benefit.
Reports of falling house prices could further undermine the market. For very many, decreasing house prices could impact their finances more than being fired. And faced with uncertainty, not moving house may be the easiest way for many to save money.
If the March cliff edge depresses house prices, a V-shaped recovery seems unlikely. L-shaped is possible but it might be a squiggly W.
Extending the stamp duty holiday would surely only postpone – and exacerbate – the inevitable. A well intentioned solution would worsen the problem. But almost anything could happen this year. The one certainty for 2021 is uncertainty.
Richard Northedge is a former Banking Journalist of the Year and was deputy City editor of The Daily Telegraph for 12 years. More recently, he’s spent a decade at a leading investment bank.
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