The correlation between inflation and the housing market
Mentioning house price data Codling had presented at The Guild conference, McKenzie asked him what he thought we could see happening to house prices. “The data shows that since 1931, there have only been 16 years of house price decline, and every other year house prices have gone up,” says Codling. “This data would have included the second World War, and of course the global financial crisis where prices dropped by around 19%. Subsequently, house prices have recovered and continued to climb. While we will see a slowdown in the rate at which we have seen prices increase over the past two years, and perhaps even a drop in prices, the housing market will remain robust and I doubt we will see any real correction in the market, a correction that many expected would happen for the last 25 years.”
McKenzie asks, given the current rising inflation rate and increase in interest rates, is there any correlation between this and transaction volume within the property market? Pointing to the data, Codling says that looking purely at historical figures, there is no correlation between underlying bank rates and mortgage approvals, which is the huge lead indicator of housing transactions.
“When mortgage rates were at 15%, there were more mortgage approvals than there were during the pandemic. There is currently concern about the mortgage rates going up and they are going up, however, contrary to what people would think, there is so little relation between the cost of a mortgage and how many housing transactions there are,” he adds.
If interest rates do not have as much of an impact on housing transactions as one would think, what does impact housing transaction volumes? According to Codling, there are two aspects that influence and drive housing transactions, the first being the need to move.
“In a normalised market, I would say that the need to move would account for around half the housing transactions. This would be people whose circumstances have changed because of a growing family or other factors that make their current living situation unsuitable for the needs. When these aspects come into play, it doesn’t matter what is happening in the broader economy, if you need to move, you move,” he comments.
“The other half of the moves are aspirational moves. Factors influencing this kind of move could include a pay rise or wanting a different type of lifestyle. You are not forced to move but want to. I say these account for around half the moves because during the credit crunch, these are the moves that we lost in the market. People that didn’t have to move stayed put. The big difference is the motivation behind the move.”
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