Do pre-election fears spook homebuyers?

By John Choong

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Data is on the side of the housing market

With less than a month until we find out who will hold the keys to 10 Downing Street, the team at Investing Insiders opted to explore whether pre-election fears result in more caution from homebuyers. This seems to be a compelling question as anecdotal evidence from brokers and lenders alike have reported both upticks as well as declines in enquiries since Rishi Sunak announced the election last month.

As such, we did the analysis and found the answers to these questions from mortgage approvals data going back to 1992 — and it's good news for the housing market.

In line with reports from property conveyancing firm, Thomas Legal, who cited a 20% increase in enquiries since the announcement, mortgage approvals do indeed rise in the month before a general election. In fact, this happened in 7/8 times, at an average median rate of 3.8% from the month prior. The only exception to this norm happened in 2017 when Theresa May called for a snap election.

Building on the case

To further make the case that interest in home-buying does actually rise leading up to an election, it's also worth noting that on average, mortgage approvals rise by 6% in the month before an election when compared to the same month, a year before. Nonetheless, the supposed “success” rate of approvals rising rather than declining from the year before sits at a lower 5/8.

The other side of the wall

That being said, not all time horizons point to a positive trend necessarily. For those who want to take a more reserved stance, it's perhaps worth pointing out that approvals find less success when compared on a quarter-on-quarter basis. In other words, when comparing the 3 months leading up to an election to the 3 months before, approvals declined 5/8 times, at an average median rate of 1.0%.

A streak hoping to continue

Nevertheless, what perhaps is most interesting is how approvals do after an election, specifically 3 months after a Prime Minister is elected. Just like the month-on-month comparison, in seven out of the eight last elections, approvals jumped at an average rate of 4.4%. More impressively, the last time this failed to happen was in 1992 under John Major. This gives this trend a three-decade long streak which we hope will continue going into the autumn.

Still, detractors may have a point in highlighting that the streak is unlikely to continue in 2024, with high mortgage rates, expensive house prices, and an affordability crisis all serving as barriers. Even so, it's worth mentioning that approvals rose by 5.8% and 6.8% in the 3 months after an election in 1997 and 2001, respectively — when mortgage rates were significantly higher before the global financial crisis.

History doesn't repeat itself, but it rhymes

However, the question begs as to why buyers rush to buy before an election. After all, the underlying train of thought would be that buyers would be more cautious going into an election, as they wouldn't want to risk the housing market crashing and getting into negative equity.

But due to human nature's way of assessing risks, we are more likely to hedge our bets with something we're more familiar with (pre-election) than risk a worse outcome with limited short-term reward (post-election). This is otherwise known as the status quo bias.

Having said all that, it's always important to remember that especially when it comes to investing, past performance is not indicative of future returns. Investing in the housing market is a long-term affair and one shouldn't base their investment decisions solely based on these trends.