At the time of writing, the decision had been voted on to hold the bank rate at its current level, deviating from the trend and allowing some optimism to return to the beleaguered mortgage market. NatWest and Nationwide have both cut rates, and the starting pistol may have been fired on the race for market share; sensing the top may be in, lenders will jostle for position as potential buyers return. The two-year swap rate – a measure market participants use to determine the cost of debt – dropped below 5% after the announcements, a signal people had been waiting for.

In this week's blog, we wanted to unpack some of the reasoning and strategy behind why the Bank of England may have acted in the way it has up until this latest announcement; it's elementary in the lending market to assume everyone else also has a closeted feverish interest in global macroeconomics, and completely forget that the majority of our clients and customers just want to run their businesses, the subtle nuances and behaviours of the financial system hold less of fascination, and that is entirely understandable.

In a previous blog, we referenced the "Volcker esq" economic strategy, so we need to quickly look at who he was to unpack that further. Paul Volcker was a prominent American economist and central banker who served as the 12th Chairman of the U.S. Federal Reserve from 1979 to 1987, during a time when the United States faced severe economic challenges not dissimilar to our own, including high inflation and economic stagnation, often referred to as stagflation.

His most notable achievement was successfully implementing a strict anti-inflationary monetary policy known as the "Volcker Shock." Under Volcker's leadership, the Federal Reserve raised interest rates to unprecedented levels to combat soaring inflation. This bold move was not without controversy, as it led to a recession in the early 1980s. However, it ultimately brought down inflation and stabilised the U.S. economy.

His most outstanding achievement was resisting the political will of the time, with a laser focus on saving the dollar. Unpopular decisions had to be made, and that's where we can draw, to a lesser extent, comparisons with the U.K.'s economic policy over the last 18 months; when you are making decisions on a central bank level, you're attempting to "save" the money, not make money, and ironically it will cost you a whole heap of cash, all politically difficult asks running up to an election.

So, if we continue to run this comparison and theorize that this is a U.K. watered-down version of the Volcker strategy, the lever not needing to be pulled quite as hard, the subsequent turbulence not quite as deep, what would be the positive takeaways for housing, based on what happened to housing in the U.S. in the following era?

Volcker's successful anti-inflationary policies led to a significant decline in interest rates. Lower borrowing costs made real estate more affordable and attractive to investors and homebuyers. This resulted in increased demand for property and a subsequent rise in property prices. Lower interest rates boosted the housing market. Many Americans could purchase homes with more favourable mortgage terms, stimulating home construction and sales. This growth benefited both homeowners and the property development industry. The 1980s saw a boom in commercial real estate development growth, particularly in major cities like New York and Los Angeles. Increased demand for office space, shopping centres, and hotels fuelled the construction of new properties, creating opportunities for property developers and investors. Finally, lower interest rates and the strong performance of the property market attracted investment from individuals and institutions.

Could we see the return to the boom period quicker than we think in the U.K. market? One thing we know for sure is the mechanic of raising rates until the system is at breaking point is historically proven to work in combating inflation: raising interest rates reduces inflation by increasing the cost of borrowing; when rates are higher, businesses and consumers are less inclined to take out loans, which reduces spending and demand. This decreased need, in turn, lowers prices as producers face less pressure to raise them due to reduced consumer demand. With all that in mind, the flattening of the rate cycle we have seen may not signify that we are at the end; we aren't anywhere near where we need to be on any metric. However, it may mean we are closer to the end than the beginning.

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