How Consumer Confidence, House Prices and Employment are Linked Together

4th October 2016
Geoff Collings

Generally speaking, if consumer confidence is on the up then so will house prices be. If the public are feeling secure in their jobs and they feel the economy is moving in the right direction, then they are more likely to be willing to move house. It’s the old battle between supply vs. demand. As the demand for homes rises without an increase in supply, then the price will invariably go up.

Consumer confidence is a tricky beast to measure but one of the longest running surveys is carried out by GFK and in their July research they found an 11% drop in consumer confidence, which was the sharpest month-by-month drop since March 1990.

The Royal Institute of Chartered Surveyors (Rics) reported a slowdown in house prices in the 3 months to the end of July, the most likely cause of this being the UK’s referendum on EU membership in June. As the economic outlook remained uncertain, Rics said that new mortgage inquiries, home sales and new instructions all fell during this period.

If we look at consumer confidence over the last 10 years, you will see that it dropped sharply in 2008 at about the time that the recession started to take hold and house prices commenced to drop. As confidence began to rise from 2013 onwards so did house prices as more and more people started to move out of the negative equity position that they found themselves in.

As equity in a property is one of the major sources of deposit available to people who are looking to move, it should come as no surprise to find that consumer confidence and house prices go hand-in-hand together.

In a Trading Economics forecast on consumer confidence over the next couple of years, they predicted that confidence will be down ever so slightly in 2017 before lifting again over the following years. This ties in nicely with what Rics predicted in their survey as they estimated a slight increase in house prices, although not at the levels we have seen in the last 12 months, as consumer confidence remains resilient.

When we transpose employment figures onto house prices, we can see how rises in house prices are directly linked to unemployment figures. Research from Lloyds Bank, suggests that areas with the 20 lowest unemployment rates have seen house prices rise by £65,000 since 2009. Houses in the areas with the highest unemployment rates rose by only £4,000 over the same period.

Demand is the key driver here, with people wishing to live in areas of low unemployment. If employment is high, then so too will consumer confidence which will then have a knock-on effect for the local community. This can then create a higher demand for jobs, so it almost becomes a self-fulling prophecy. However, all of that will need to be unpinned by business confidence as that is what will drive the local economic health of an area.

What this means for the homeowner, is that those who have bought in a prosperous area where there are high levels of employment will see a greater gain on their property value than those at the opposite end of the scale. The impact that this will have is that it is likely to increase the gap between the rich and the poor in this country.