The success and buoyancy of the retail sector has a strong connection to the housing market.

The success and buoyancy of the retail sector has a strong connection to the housing market. If houses are being bought and sold, people will spend a bit more cash to make “home, sweet home”.

The all-important mortgage and housing markets have remained in the doldrums of late, held back by lender risk aversion and households that want to move but are unable to find enough capital to put up as equity.  However, the government has acted and the Chancellor’s Budget will leverage its balance sheet to address the problems of the mortgage market, boosted by the Help to Buy Scheme.  Also, we see real incomes starting to recover, mortgages becoming available and also people finding homes more affordable as the house price to earnings ratio starts to fall.

The Ernst & Young ITEM Club Spring Forecast, released this week, expects a million households to move this year which is positive news for the retail sector.  Sales of household appliances and other expenditures involved in moving home should be increasingly buoyant as a result. We also see a strong correlation between housing transactions and consumer confidence.  As house prices are set to follow an increase in transactions, people will feel that they have an increasing amount of personal equity.

According to the report, there is also the added boost for the sector of the increase in the personal income tax allowance that will add 0.4% to disposable incomes over the next two years. Combined with strong employment levels, which have allowed income growth to overtake inflation, the Ernst & Young ITEM Club expects someone earning the national average salary of £23,000, to have an extra £280 in their pocket by the end of the year.

This is welcome news for householders, who should start to feel a little better off and this may feed through to higher levels of high street spending. The Ernst & Young ITEM Club report expects consumer spending to increase by 1.2% this year and 1.9% in 2014. But the 2.2% growth predicted from 2014-16 is well down on the 3.7% a year it averaged in the decade prior to the financial crisis.

However, we should, of course, not expect to see a return to pre-crisis levels of spending. While consumers may have a boost to their discretionary spending pot, they are likely to continue to err somewhat on the side of caution. Confidence does remain tethered with consumers preferring to maintain strong savings ratios (at 7.5% for 2013 albeit with an expected fall to 6.5% for 2014) and consciously reducing levels of their personal debt rather than racking up store and credit card bills.

Julie Carlyle is Ernst & Young’s head of retail