Reflecting on his time in the mortgage industry, Nitesh Patel (pictured), strategic economist at Yorkshire Building Society (YBS), explained that as a result of recent events, the narrative in this market has fundamentally shifted.
Patel has been an economist for almost 30 years, having first worked for BAK Oxford Economics in Basel, forecasting financial services industry profitability.
After his time at Lloyds, he moved to the YBS in September 2018.
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Patel explained that the it was the intricate nuances of the role of economist – and the mortgage industry as a whole – which originally attracted him.
He said: “Being an economist has so many different facets to it, but in terms of the mortgage market there’s a lot of interest around what happens on the macroeconomics side as well, with the supply of homes, water, the availability of land, resources, the profit margins and the risks required by the developers.”
Patel added that he clearly remembers when he first started working in the mortgage industry.
“I literally joined two weeks before the Northern Rock collapse, so I joined at a really, really interesting time,” he said.
In 2007 Northern Rock, reportedly the fourth biggest bank in the country by share of lending at the time, became one of the first UK corporate casualties following the US prime scandal, followed by shock waves across the economy.
Asked if he learned anything from that episode, Patel said: “Not to take risks…not those kinds of crazy risks, anyway.
“I think everybody learned from it. I was in a team that actually looked after the Halifax House Price Index and the manager asked me what I thought was going to happen to house prices.
“I stepped back and said, I think it’s going to be very similar to what we saw in 1974/75 when you had the end of Ted Heath’s Conservative government and they relaxed monetary policy and allowed a lot of lending in the mortgage market.
“They had a house price boom, but as soon as the Labour government came in, they imposed direct controls on mortgage lending, and as a result, house prices plummeted.
“I remember saying to him that something similar was happening.”
The price of mortgages rose immediately afterwards, as Patel had predicted.
As for current trends, his thoughts on the Bank of England’s decision to raise the base interest rate to 0.5% last week go beyond the fact that four out of the nine policymakers wanted a bigger increase.
He said: “I was definitely surprised that four of them were looking for a much bigger increase of 50 basis points, but I think this is probably the first time in spirit that all nine members agreed to raise the rates.”
For Patel, the move raised all manner of questions: “Is it transitory or temporary inflation caused by a lockdown where you’ve had imbalances in goods and labour markets? Or is it something much more permanent or persistent?”
He listed many of the incidents that brought the world to this point, from shipping lane disruptions, global supply chain issues and labour market shortages – not forgetting that COVID-19 has yet to be fully resolved.
In fact, the impact of the pandemic has been so profound that it has transformed the narrative around mortgages.
“The demand for housing has been driven very much by people wanting more space to work from home, because they don’t need to be close to their place of work anymore,” he said.
But if COVID-19 shattered the traditional concept of the workplace, it also enabled people who were able to keep their jobs during successive lockdowns to accumulate around £150bn in excess savings.
However, Patel dismissed fears that rising inflation could reduce their impact on the economy, given that the BoE also predicted that disposable income would contract by 2% this year.
He said: “Normally, you expect that kind of compression in real earnings as the GDP goes into negative territory, but we’re not seeing that, so the argument is either those households were lucky enough to boost their savings the last couple of years, or they’ll simply use part of their savings to finance consumption.
“So, if inflation is eroding savings, it’s not as a real value, it’s through people using it to finance consumption.”
Patel expects to see a slowdown in house price growth compared to last year, but has predicted that prices will not go into negative territory.
He explained that “they’re probably going to be round about 5%” and that rates would still be below 1% following the next couple of MPC meetings.
External factors, such as the ongoing Russo-Ukrainian conflict, could have a knock-on effect on the housing market, by way of even higher gas prices, inflation and, finally, unexpected interest rate hikes.
“There was some work done to see what would happen to house prices if interest rates went up to 2% and they found there would be very modest changes only. But if it goes above that, then you’re in a rather difficult situation,” he said, stressing that this would be “an extreme scenario.”