Rashmi Duve: House prices can tell us a lot about the economy

The recent headlines, in terms of business news, have seen interest rates go up, the pound weakened and house prices go down. But why should it matter that much if house prices have gone down? In any event, wasn't it predominantly in London? Is there a significance of these factors, in terms of having an impact on consumption? If so, what effect does this have upon the business ecological system?

STOCK: Sheffield housing.
STOCK: Sheffield housing.

The UK house sales, in a year-on-year comparison, fell overall by 14 per cent, with the biggest percentage decrease being London at 23.9 per cent followed by the South East at 19.7 per cent and the East of England at 17.4 per cent. Yorkshire and the Humber were in fifth place at 12.9 per cent (Source: ONS, Land Registry). If demand for houses falls, it can have two immediate impacts:

1. Construction projects could be placed on hold, which means this will have a knock-on effect within the business ecological system as less purchases for materials and services would be required; and

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2. The average consumer is also less confident so less will be spent on a personal level or they will be unwilling to take on more debt/borrowing.

If the average person is spending less, this inevitably has an impact on businesses as a whole. Let’s take the manufacture of a car; where the business has to import materials, it could find themselves not just with higher costs because of the weakening of the pound, but also a possible reduction in sales because the consumer becomes wary of spending. The car manufacturer, therefore, must keep an eye on the changes occurring in what would seem to be a market unconnected to theirs because of the detrimental impact it could have on their business.

Keeping an eye on house prices can tell us a lot about the confidence people have in the economy and how they are likely to react long term. This in turn will help you plan your business sales and outlook at a very minimum for the next 12 months.

As I’ve already mentioned, a combination of events have occurred recently in addition to the house prices dropping. For example, the Bank of England has been saying for some time, and have now followed through with, a rise in interest rates. Although this may not have an impact on most people initially, it may have made a lot of us cautious about buying a house. The ability for people to borrow also changes on a personal level and in terms of business.

However, there is a difference in business; you find that borrowing can be easier but what you have to watch out for are increases in costs, reduction in sales and lack of early strategic planning to ensure you avoid any major downfalls.

Things to keep an eye on:

1. Debtors: ensure that you have credit control systems in place to get paid on time. Do not allow debtors to exceed time to pay by more than 14 days.

2. Costs: costs can increase slowly and with the rise of interest rates and weakening of the pound, materials may cost more. Ensure you are watching any reductions in your bottom line. If the economic climate changes again with effects, for example, arising out of Brexit you may have to make a decision on increasing price.

3. Orders/Purchases/Customers: Sometimes you can be faced with a downturn in orders. For example, the service industries may face a downturn where businesses want to retain cash and reduce services such as public relations and marketing.

Equally, contracts can be lost, for example, in the retail industry where shops are facing further closures such as Marks & Spencer’s which announced in May this year that they would be closing stores with a view to restructuring and as of last week saw seven of its stores closing, will have a knock-on effect on sub-contractors such as window cleaners and shutter repair businesses, not to mention landlords.

4. Disputes: Often when things get tighter in business, more disputes arise as either contracts are not completed or not carried out in accordance with the terms agreed. Nipping disputes in the bud quickly can often save a lot of money later but does take time away from the day to day.

5. Review your loans and overdraft facilities: Now is an excellent time to review this. Higher interest rates can mean that it makes it easier to borrow but only because it is lucrative to lenders. Ensure you allow plenty of time to shop around.

House prices and the surrounding matters such as interest rates and the strength of the pound have a significant impact on all business no matter what size or what region.

Keep an eye out for the changing climate and adjust your sails accordingly.