Confidence – what part does this play in activity levels in the property market?

With decades of experience in the property finance sector there are clear patterns that we have seen where confidence has impacted the markets decision making. It is interesting to explore the psychology of confidence on activity and decision making.

Interest rates play a crucial role in shaping economic decisions, affecting everything from personal savings to business investments. Since the global credit crisis of 2007/08, interest rates have been subject to a rollercoaster of influences which has kept them historically low for such a long time. Such factors include political policies or events like the global credit crisis, mansion tax, Scotland’s referendum, UK elections, Brexit, COVID-19, and most recently, geopolitical tensions in Ukraine and Gaza. These events have had a significant psychological impact on individuals and businesses, shaping their actions and decisions.

To briefly touch on one of these points, the tension between Russia and Ukraine has contributed to increased gas prices in the UK which in turn has contributed to a higher inflation rate and therefore interest rates. So we can see how these factors work hand in hand. These events have not only influenced monetary policy but have also affected public perception and economic decision-making.

Considering the current economic landscape, many experts believe that interest rates are on the path to peak at around 5.5%. It’s likely that they will remain at this level for the next year, offering a sense of stability. As we move towards 2025, there is an expectation that interest rates will soften, hovering around 4% for a few years. This projection raises questions about the timing and pace of interest rate increases.

Whilst we can ask ourselves, should interest rates have gone up before December 2021? Should they have increased more slowly so household and business could acclimatise more easily? What is the impact of higher interest rates when a whole generation has grown up in a historically low interest rate environment. We will cover these implications in other articles.

It’s interesting how we can compare property finance activity level in 2019 to 2023. We can draw some interesting parallels. In both years, individuals and businesses exhibited similar behaviours due to external uncertainties. In 2019, the uncertainty revolved around Brexit until a newly appointed PM, Boris Johnson struck a deal, which instilled confidence in the market and confidence to act. This year, the focus shifted to interest rates and how high they would go, leading to hesitation in making financial decisions, similar to the Brexit impact in 2019. As people gain confidence that we might be approaching the peak in interest rates, and therefore gain a better understanding of what’s happening and what’s to come, will confidence and therefore activity increase?

One factor that remains consistent is the supply and demand issue that constantly plagues the housing market. With the demand for housing consistently outstripping supply, there is a strong argument that house prices will remain high but level, however high interest rates will have a compounding impact on the cost of borrowing and therefore affordability will likely reduce.

This situation is an important consideration for both lenders and borrowers, as it affects mortgage affordability and the overall activity levels in the housing market. With housing prices levelling off, it is likely that activity will return if there is confidence that interest rates are more stable, especially as rents are so high.

The psychology behind interest rates and the resulting actions is a complex interplay of external factors, economic predictions, and human behaviour. As we navigate through these uncertain times, it is essential to recognise the significance of confidence in driving economic activity. Understanding the past can help us make more informed decisions in the future, taking into account the ever-changing landscape of interest rates and their influences.

What do you think? In what way does confidence impact how and when you make decisions relating to the property market? Let us know your thoughts.

If you are currently lacking confidence on which decisions to make, we are here to help you navigate the market. Our wealth of experience in property finance is invaluable in such turbulent times. We are here to help you make an informed decision. Feel free to call 01932 505 340 or email us at: [email protected].