Stagflation and the Message for Mortgage Advisers

Some of you may be old enough to remember the three-day week and power cuts because the UK didn't have enough energy to supply our homes for the whole week. That was 1974. The previous autumn, we had the oil shock as OPEC began an oil embargo and severely crunched most western economies.

The UK was in a mess.

Plus, we had Stagflation and we may well get it again. We had high prices, slow economic growth, and high unemployment back then. A right pickle because raising interest rates to combat inflation merely created more unemployment, so it was resisted.

So listen up to see how you might talk to your mortgage clients about the effect.

Our CPI is creeping upwards caused initially by demand outstripping supply and then supply bottlenecks in global trade. For example, after Lockdown, people had lots of money in their pockets and called in the builders to improve their homes. We had a limited supply of builders, so prices went up.

Also, last year, everyone had money in their wallets to buy UK based holidays, so prices of AirBnBs and other Staycation holidays soared upwards.

Next, we had supply problems, particularly with gas and oil, as the world opened up again after the Pandemic. Prices surged. This has been further exacerbated by the war in Ukraine. Both combatants are known for their exports of grain and gas/oil.

This has caused inflation, and our Bank of England is raising interest rates to deal with it. They hope that by shrinking the money supply, they'll dampen demand for everything and tame the inflation tiger. It's ok at the moment because we have maximum employment. Everyone who wants a job has one.

But the inflation we're experiencing is already doing this. It's eating into our disposable income. We all have seen energy bills increase, and buying petrol at the pumps requires a second mortgage. I've already heard of builders saying demand for their services is slumping. People are cutting back on discretionary spending to offset their gas bills. Typical reactions of consumers with less money in their pockets and lower confidence in the future.

Businesses come under pressure to raise wages as people need to earn more to counteract the increase in prices. This creates more inflation as companies just put their prices up to pay for the wage rises. Alternatively, they sack their expensive workers and replace them with automation or cheap labour; you only have to look at the ferry company in the press at the weekend – shame on them. The economy slows down, and we have weak economic growth. If we start getting a movement in jobs the wrong way, we'll have Stagflation.

We don't want a recession, and I hope the Bank of England doesn't raise interest rates too high. Raising interest rates is designed to reduce growth remove money from people's pockets, thus dampening inflation. Economic growth is meagre at the moment anyway, so this could be very damaging.

We are entering Stagflation again. Remember this is high inflation accompanied by low economic growth

Actions for Mortgage Advisers

  • Mortgage broker pondering can extend to investing in tech more. This doesn't require petrol to run. Cutting costs where possible, keeping some cash in reserve. Keep those bounce-back loans. Making the jump to a virtual advice model might be just the tonic. With a low operating cost model, you can weather any storm.
  • Clients taking out mortgages is good during high inflation as the value of the debt erodes quickly. Landlords just put up their rent by CPI each year anyway, and there's much demand for rentals. This is an excellent market to be in. As is development finance to convert those desirable ex-commercial units into attractive residential for rent.
  • So long as the interest rates don't rise too much, fixing now might be a good omen at least for five years. I believe the Bank of England will raise rates but not too much. There are clever people there who know what they're doing on Stagflation, so this is a good portent. In 1972 interest rate changes were ruled by politicians, who generally are not as versed in economics as Bank of England civil servants. Civil servants are not too good at being interviewed by the press, but that's another story.
  • Physically putting your money into assets is recommended. Of course, property is an asset and will generally grow in value during times of inflation.

Now you're prepared.

I don't remember 1974 much either – I was only 10 and was more interested in comics and sweets. It wasn't until 1982 that the UK tamed Stagflation; we might be on the same ride.

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