Confidence high? - 23 June 2008

Posted by Paul Collins No comments

Go on - be brave

The trials and tribulations of the UK economy have been making the front pages of the newspapers and the top of the TV news for most days of recent weeks. The falling property market naturally makes up a large part of this, and some days it is hard to see where and how the market will regain the confidence it had previously.

Despite this, the National Association of Estate Agents last week said that confidence among first-time buyers (FTBs) was beginning to return, and that there were signs that this crucial market sector is less affected by the credit crunch than feared. New-build website SmartNewHomes.com surveyed FTBs and found that just 13 per cent had been put off by the current situation.

While it is true that the property market is going through a tough time, as, it seems, is almost every other industry sector in the world, there is a feeling among some analysts that we could be talking ourselves into an economic recession. Don’t get me wrong – the next two years are going to be tough, financially. No-one is trying to disguise or deny the fact that trading is difficult, but is it all as bad as we think it is?

A friend of mine is a financial adviser, and through conversations with him, I have discovered things about economics that I never before considered. Firstly, interest rates. We all track the minute movements of the base rate as set by the Bank of England, and papers are often calculating what the latest 0.25 percentage point rise or fall will do to the money in our pockets. What I didn’t appreciate was that it is apparently natural for a developed economy to have an interest rate of around five per cent. At this point, I am told, growth can happen easily while inflation is kept in check – a situation that we currently don’t have.

The other thing I found out, and which makes sense when you think about it, is that 90 per cent of the health of the economy depends on the confidence of the market. To a certain extent, no matter what statistics you put in front of people, if they have no confidence in the market conditions, they will not invest.

In some ways, I feel that this is the situation that we currently have in the UK. While the economic signals are less than encouraging for parts of the market, other people should be seeing opportunity. Part of the problem in the property market is that there are very few transactions taking place, as no-one has confidence in the immediate fortunes of their investment. Banks are lending less and with stricter criteria than for some time, as they have little confidence in their own ability to manage their exposure to risk.

There is a real need for market movement to pick up, in order to stimulate buyers and sellers alike. For this to happen, it seems, someone needs to do something to increase confidence in the property market. When people need confidence in the economy, there turn more often than not, to their elected representatives. So why is it that the Housing Minister has been relatively quiet over the past few weeks? Surely, this is the time to come out and declare that property owners can have confidence in the system, and that prices and transactions will bounce back. Surely, this is when the government should say that they still plan to reach their target for new homes in order to house the growing population.

Perhaps the government is wary of losing the voters, or of causing more panic than reassurance. If this is the case, I think they give the population little credit for their resilience and adaptability. Take the rising cost of fuel as an example. Prices at the petrol pumps have risen by up to thirty per cent this year alone, but at the same time sales of petrol have fallen by 20 per cent. This indicates that there is a threshold of affordability, and tolerance, among the public. The rising costs of running a car are making people look at the alternatives, and they are finding ways of using less petrol. Logically, it follows that people will find solutions and alternatives to the housing market issues that are currently facing them.

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