UK Mortgages at ten-year highs buoyed by low interest rates and general election results

The General mood in the United Kingdom is a jubilant one since the December 2019 general election results came out. It seems the biggest drag on the general sentiments of the people in the country has been eliminated once the clarity on the modalities of Brexit was established. Business sentiments which were low in more than five years across the board have also seen a major upturn even in the first month after the announcement of the results of the general elections. What's even more surprising is that all the stimulus packages doled out by Bank of England in the past couple of years did not have so much effect in turning the tide of the economy like this one seminal event of the outcome of the general elections.

The decision of the United Kingdom to leave the European Union in July 2016 caused much distress to the country and its economy which had not been anticipated before. Several businesses that had taken the advantage of the relaxed regulatory and tariff regime in the European Union era had expanded their businesses significantly. Men and material sourcing had advanced to the advantage of both parties, where people from smaller European countries found better employment opportunities in the United Kingdom and British businesses were able to procure materials cheaply from beyond the borders of the country. However, over a period of time, this arrangement led to the erosion of skillsets and manufacturing capabilities of the United Kingdom. The financial services sector of the United Kingdom, which boasts of being one of the most recognized in the world, and London being the most important financial hub of the world were now taking directions from Brussels as part of European Union whereas it should have been the one leading innovation in the field. This led many in the United Kingdom to believe that long term growth and development of the British economy was being hindered by being part of European Union and it was high time the country separated itself from the bloc.

What made matters worse was the 2008 financial crisis, the role played by many European countries in a sovereign debt crisis that plagued the Union then and the manner in which these countries had flouted the rules and regulations left much to be desired in the way the Union functioned. Many of these member countries then required a bailout in order to meet their sovereign obligations from the European Central Bank, the expenses of which was eventually footed by larger and more financially disciplined countries like France, Germany and United Kingdom. This infuriated many in these large countries who were angry as to why their hard-earned money was being used to bail out undisciplined entities based in these countries, who were guilty of shoddy and irresponsible conduct and whose only intentions appeared to exploit them of their hard-earned money and clean up their books.

However, the decision was not an easy one; the rolling back of the business and economic ties which had been developed over several decades was not easy an easy one. Several industries faced the unprecedented risk of severely cutting back on their business activities and some even faced closures. The biggest problem that would come to haunt the British economy after Brexit would be the restrictions on the movement of people between the United Kingdom and the rest of European Union and enhanced tariffs on the movement of goods between the two blocks. The financial sector, the manufacturing sector and the hospitality sector would be the most affected by the restriction on the movement of people. For the financial sector many of the large multinational financial institutions were able to expand their businesses into large parts of Europe while being centrally located in London. However, now with the movement of people restricted, decentralized hubs in different parts of Europe would require to be set up, making operations more expensive and in many cases unviable. The hospitality and the manufacturing sectors took advantage of the people movement by hiring a large number of non-British, skilled and non-skilled labour who would often be available for cheap rates and also put in extra labor. With restrictions on the movement of people in place, many of these people would have to move out creating a temporary shortfall of the workforce in the country that would need to be replaced by locally available expensive hires.

All of the above brought in clouds of uncertainty about the future in the minds of many businesses in the United Kingdom. The policy-making group also did not rise up to the occasion and relieve the people of their concerns. The constant bickering among the policymakers from both sides of the Atlantic and their inability to arrive at a consensus regarding a smooth Brexit withdrawal put even more pressure on the business sentiments in the country. The result was that most companies started to curtail their businesses, consumers started to postpone their spending and capital expenditure across the country took a severe beating. The capital markets also performed poorly during the period; most of the stocks listed on the London Stock Exchange started to trade at discounted valuations because of the adverse macroeconomic overhang. Most of the foreign institutional investors also decided to stay away from the London Stock Exchange during the period leading to a serious erosion of London’s reputation of being one of the largest destinations of international capital flows in the world. Such were also the state of affairs of important markets like the debt markets and the bullion market which are operated out of London.

All through the period, however, the Bank of England had been trying its level best to alleviate these negative sentiments will all the tools available at its disposal. The interest rates were lowered, and banks were put through enhanced stress tests to instill confidence among businesses and people, but the overhang was too strong to be neutralized by these measures. Such was the situation that towards the end of 2019, the Bank of England was in a fix whether to further lower its interest rates to spur growth in the economy or face a liquidity trap, which could potentially damage the economy more than inducing any growth at all.

However, as difficult as it was for the Central bank to decode the crisis, the solution came easy. The business sentiments, that were not reacting to any stimulus, responded swiftly to the General election results in December 2019. A host of important economic indicators which were over several months sliding down suddenly started to trade in the green as if they were waiting for the election results to be disseminated.

This jump in Mortgage numbers in the United Kingdom, where almost 1 million in mortgages were approved by large banks in 2019, is not only a sign of improving business sentiments in the country but also a reflection of the pent up demand in the sector that had accumulated over several years. Out of these almost 50% went to new home buyers while the remaining were remortgages. People who had postponed their home-buying decisions and other capital investment decisions now see the environment improving in the country and now are making forward investments to take advantage of the same. The next important event, however, which will determine if this trend will continue into the future will happen on 31 January 2020, when the actual Brexit event will come to pass.