It’s all about confidence (From Gazette)

It’s all about confidence

8:29am Thursday 13th December 2007 in

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Even though predictions for 2008 insist on a rise in house prices of up to five per cent, the housing market continues to slow down. Home owners are wary. With fixed mortgage rates about to feel the full weight of the real world and credit more costly, many are thinking twice about how they spend their money. In the fourth of the Gazette's special reports on housing, IRIS CLAPP looks at what a slowdown in the housing market means to the north Essex economy - and us.

Shops love Christmas.

Do well over the festive season and they are right for the rest of the year.

With most retailers making more than 50 per cent of their annual profit in little over four weeks, they want us to do nothing more than spend, spend, spend.

This year, though, will be different. For many homeowners, fixed mortgage rates are coming to an end, and that means a big hike in repayments.

Couple that with a hefty rise in food prices and people will think twice before dipping into savings or running up credit card bills.

Don Henshall, business boss on Colchester Council, thinks homeowners are being careful.

"The Christmas spend this year looks set to fall by 2.8 per cent, with consumers looking to spend more cannily and putting less on credit," he declared.

"This will mean retailers will in turn need to raise their game to maintain their margins.

"Of course, this is not unique to Colchester and north Essex. There is a slowdown everywhere in the housing market - and a healthy housing market is pivotal to economic success."

It is easy to see why. Everything has a knock-on effect - and, in the UK, the economic knock-on effect begins and ends with the housing market.

Michael Sherer is an economics professor at Essex University's school of accounting, finance and management. A buoyant housing market, with house sales increasing year-on-year, means there is plenty of money around. When sales drop, many things begin to happen.

"Let's look at the response of the construction industry," said Mr Sherer.

"In north Essex many areas are undergoing economic regeneration and that regeneration depends on the new-build housing market.

"If there is a slowdown in the housing market - currently, flat sales are falling - developers, who work months in advance on housing projects, will put those projects on hold. The impact can be tremendous, especially as there are so many jobs tied up with these developments.

Those who were expecting work won't find any - and, yes, that could happen at the new homes developments at the Hythe and Cuckoo Farm in Colchester."

No work means less cash and less to spend. Less to spend hits retailers and, conversely, the housing market. The last thing you want to do when your job is on the line is to move house.

"But that hasn't happened yet," stressed Mr Sherer: "which is why the situation today is so different to the recession of the early 1990s.

"Then, the housing market did slow down, and pretty badly. But it had grown too quickly, properties were horrendously overvalued, too many people had mortgages inappropriate to their incomes, and then the job losses began."

These were huge and across every industry. Suddenly, homeowners didn't have jobs - and they couldn't meet the mortgage repayments. They saw the value of their homes plummet - in some cases more than 50 per cent in two years.

"If employment stays firm, people will mitigate increased costs to their mortgages," said Mr Sherer.

"But our whole economy really depends on what happens elsewhere. Oil prices must remain stable - and we don't want any more Northern Rock scenarios.

"We must also hope the American Stock Market keeps healthy. Should it be badly affected by the American mortgage crisis, then it could impact on UK pensions (pensions companies invest in the American markets)."

Don Henshall would advocate optimism.

"We have got to be realistic and understand this is a cycle. We are used to dealing with up and down trends in our economy, and will be able to deal with this one," he explained.

"The most important thing to realise is the economy is all about confidence. If you are confident about your financial future, you will spend - and there are a lot of businesses which rely on that confidence."

The north Essex economy - particularly Colchester's - depends on retail and tourism.

"We do have healthy retail and tourism sectors," he pointed out. "More and more people are coming to Colchester to shop and we are currently getting five million visitors a year into the town."

Yet Mr Henshall also insists with optimism must come caution.

"Yes, there is enormous pressure on parents at Christmas to buy the latest electronic gadgets and designer clothes but it doesn't help anyone, least of all the economy, if they can't afford those presents.

"Remember - we can't second-guess what will happen (to the economy). So, let's be a little bit careful."

• Tomorrow - how two homeowners came through the 1990s' housing slump.