It seems the Bank of England has spotted the issues regarding the potential bubble in the housing market as referred to in our article.
Ironically, as I mentioned in this recent post, I think the froth in the market was starting to soften anyway. There is further evidence of this in the latest release from MasterCard spending pulse, which has reported that consumer spending in November had grown by a disappointing1.5%, below the rate of inflation.
This is possibly due to the fact that we had so much exposure to the many and varied ramifications of the 2007/08 financial crisis – unlike in previous major crises when it may have been a few pages in the Daily Bugle; maybe we are just a little better prepared as individuals and are acting with a little more caution than we did 10 years ago?
I just had a feeling, a little time back, that the new-found confidence was starting to wane, particularly as wages were not increasing at the same rate as inflation, or indeed house prices. Of course, a major factor in all this resilience to the biggest financial crisis for a generation, and new bubble, has been the unintended consequence of London (ironically) becoming a safe haven for Russian oligarchs and other of the Eurozone super rich who needed somewhere to park their money!
If this hunch (I admit, non-evidence based) that just a little bit of the gloss was coming off, the Bank of England may have applied the brakes too soon…
If this is the case, as we sit right now, these are (some) of the potential consequences:
1. Mortgage rates
The withdrawal of the Funding for Lending (FLS) scheme – that has enabled banks to borrow at lower rates for mortgage borrowing – will inevitably mean higher interest rates. New mortgage and savings rates are approximately 1pc lower than when the FLS was launched in mid-2012.
2. House prices
It is likely that this increased pricing will lead to a reduction in availability of funding to some of the more ‘extended’ borrowers, resulting in lower demand and therefore softer prices.
3. House builders
Share prices of the house builders immediately fell by 5% on the announcement.
4. SME owner managers
All homeowners feel better about their financial well-being when house prices are on the rise. The reverse is true when prices are falling. This is particularly the case for SME owner managers, who have a habit of constantly assessing their personal balance sheet, and make business investment decisions upon this. This may not be a conscious link, but it is there. I do it myself.
5. SME business investment
If the financial well-being of the SME owner manager takes a further knock, business investment will drop from the low levels already in this sector.
6. UK growth
Given that investment could fall, and that the SME is the engine room of the economy, this will have an adverse effect on UK GDP.
7. Alternative finance
If interest rates to savers start to go up, money – that is currently applied to peer to peer lenders in the search for income – might start to be withdrawn, putting the onus back on to the banking sector that is already struggling to deal with the SME sector.
8. Government coffers
If this proves to be the case, the Government will start to receive less in taxes and start to have to pay out more in unemployment and other benefits. The Government will then have to borrow more, and the cost of their borrowing could go up.
Just scenario planning…
Of course the above is just an exercise in scenario planning, in relation to this latest move by the Bank of England and how it might affect business finance in the SME sector.
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