The Yard Sticks used to Measure the Economy are Outdated

Speaking to Iain McKenzie, CEO of The Guild of Property Professionals, Dr Savvas Savouri, Chief Economist for Toscafund Asset Management, said that sectors such as the housing market are still viewed with the same metrics as they were in the 80s, however, much has changed since then.

“The narrative was that last year we were going through a housing, labour and banking crisis, however, in my opinion, nothing could be further from the truth. The housing market was incredibly robust. There was 14 years of zero interest rates, which means that if someone was mortgaged, they were paying down their principal, but this was denying banks income. When base rates are close to zero, the economy is essentially on life support. At the moment there is an exaggerated narrative that interest rates are raising at a frenzied rate, however, in reality for the UK economy to be functioning healthily, rates need to be between 3.5% and 4.5%. We are at 4.25% and could possibly go to 4.75%, which is nothing to fret about because ten million of the twenty million private homes in England are ungeared. Added to that, there has never been more mortgages that are fixed rate,” says Savouri.

He notes that despite the fixation of the media with the increasing interest rate, there is not an immediate transfer between the base rate and mortgage rates, again pointing out that ten million privately owned homes do not have mortgages. “The base rate should have started to be raised in 2013, however, it wasn’t because the Bank’s Governor at the time was inept. The journey to 4.5% should have started then, so that it could have been a gentle incline rather than the far steeper incline we are currently experiencing,” Savouri comments.

During the podcast Savouri goes on to discuss and debunk several other economic metrics that don’t reflect what is really happening in the economy, such as the way GDP is measured. “Consumer behaviour has changed; however, this hasn’t been considered in the metrics. For example, GDP looks at aspects such as food purchased from grocery stores, but not food that is delivered to homes from restaurants. It also looks at the petrol we put into our cars, which shows a decline because people are driving less petrol-driven cars, as they are getting things delivered. So, whenever you see GDP, add 0.2 to it, because there is an unnatural bias to GDP,” he explains. 

McKenzie and Savouri also discussed the probability of a recession and why the property market will continue to move from strength to strength.

Commenting on the latest edition of the podcast, McKenzie, said: “Dr Savouri’s insight into the factors at play and how they will impact the property market and the greater economy are fascinated. While there is so much doom and gloom constantly reported, it is great to have the curtain drawn back to see what is actually happening within the economy and what we can expect to see in the months ahead.”

To hear this conversation in full, visit The Home Stretch podcast.