The Sonic Boom in Mortgages

The alert came from homeland security, a private jet was hurtling across British airspace without any communications. A squadron of RAF fighters took off to intercept. At top speed, breaking the sound barrier, a sonic boom was heard across Essex and South East London, like an explosion; many thought we were being invaded. Frightening.

In the same manner, our economy is about to experience its sonic boom.

Businesses have “war chests” of cash, as do a lot of consumers. People are desperate to explore, travel and meet people again after being cooped up for over a year. The economy will bounce back in many sectors.

The housing and mortgage sectors will continue to grow as people upscale their homes, more gardens and space to accommodate the working-from-home brigade. Houses have become somewhat of a sanctuary for many providing security and comfort during these awful times. Government-backed high loan to value mortgages will rejuvenate the first time buyer cohort and add a zest to the market. Part-time landlords will sell their stocks to avoid crippling capital gains tax hikes in the future.

All rosy, but there’s a warning. But this has a bountiful side effect for us in the mortgage sector.

As the economy bounces back with a dramatic increase in demand, we may have a supply shock. Supply problems caused by Brexit, recession, off-loading staff too early, delays in un-furloughing, warehouse shortages, the list goes on.

When this happens, supply can’t keep pace with demand equals inflation.

Inflation picks up, pay rises follow, prices rise. The years of quantitative easing and government borrowing will catch up since the money supply has ballooned. Inflation may be with us for some time. Who knows, but the logic points to it.

Inflation is threatening for those relying on savings and fixed pensions or those on salaries that don’t increase quickly.

Inflation is good for borrowers and those who own assets. So mortgages on property fit the bill. Inflation erodes the value of debt for consumers.

It also erodes the government debt pile. GDP accelerates; they expect a 5 to 10% rise over the next few years. This ensures the government borrowing pile falls in comparison. Inflation erodes its value, and a higher GPD makes it a lower proportion. The government like this. Expect the government not to prevent it; it solves their borrowing dilemma.

So think interest rates; they will rise as well. Fixes are good, debt is good, mortgages are good. Let’s make hay whilst the sun shines.

It’s our sonic boom.

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