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Where next for house building demand?

Posted: 17 Jun, 2014.

More than just a dinner

The Mansion House speeches given by the Chancellor and the Governor of the Bank of England, most recently last Thursday, are stooped in tradition and have been used in recent times as an occasion to provide the financial world with indications on economic and monetary policy and the anticipated timing of key events. Since the early part of the last century the great and the good (no irony intended) of the City have been recipients of the Chancellor’s thinking outlined in his speech. The speech normally reinforces the current policy direction with the occasional announcement of a new initiative or change in policy. In 1985 for instance the then Chancellor, Nigel Lawson, announced that the inflation rate rather than money supply would be the target by which success would be judged. It was quite significant at the time and Lawson said “The inflation rate is the judge and jury”, which it probably always was!

The financial world pays a great deal of attention to these speeches to gain an insight into both the Chancellor’s and Bank’s intentions. This year was no exception and the Governor, Mark Carney, gave a clear indication that there was likelihood of a rise in interest rates sooner rather than later and that the recent house rise boom needed to be tempered. The market reaction across the Atlantic was immediate with Sterling strengthening towards $1.70 and the following morning shares fell significantly for all housing related businesses within the FTSE.

Things are moving

The economy is clearly moving in the right direction and all indicators show that growth has been consistent, but the elephant in the room is the housing market which is proving a problem difficult to solve. The housing market and the economy in general is of great significance to companies such as JB Kind Doors as a buoyant housing market increases demand for our products. However, no one wishes to see growth accelerate fast before contracting again creating a false “bubble”. The Chancellor has announced a number of important initiatives over the past two years to stimulate house build activity and these have had an impact with house building expected to increase by over 20% this year.

Looking into the future

One problem for this current housing “bubble” is that it is not uniform and is concentrated principally within London and the Southeast where external influences, such as foreign investment, in housing stock are disproportionately inflating prices. To apply the brakes on this “bubble” by limiting the amount people can borrow is a reasonable and responsible means of applying a steady brake to house prices. However, this does not answer the fundamental problem that there is a national shortage of housing stock and basic economics dictate that when demand is greater than supply then prices go up.

As businesses we are unable to influence these events but instead have to use our crystal ball to try and make some sense of how the future might look. It is to be hoped, however, that the politicians and civil servants who can influence the economic ebb and flow have something more scientific than a crystal ball, but sometimes I wonder.

 

By James Cadman

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