Working within the business cycle
A Building Societies Association case study

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Page 3: Boom

During a boom, there are high levels of economic growth. A boom has a number of characteristics. Employment levels are high and wages may rise as businesses try to attract employees. Consumer confidence is strong and consumers have a positive outlook on the state of the economy. This then causes an increase in demand as people spend more on goods and services.

Businesses tend to increase their investment during a boom phase and many new businesses start up. However, during this time there may be an increase in inflation as prices rise in response to greater demand and increased costs.

For building societies, a boom is an important period. As wages increase, many customers wish to save more. This results in building societies being able to lend more to their members. People have more confidence and are willing to borrow to buy property.

In boom years, house prices can increase so rapidly that some potential homebuyers find houses become unaffordable. Building societies understand that getting onto the housing ladder in this period is difficult and therefore societies aim to offer more services for first-time buyers. For example, they can offer new ways in which customers can buy their own homes, such as the provision of shared-ownership schemes. This sort of service has been developed through work with government and local authorities. This means people need a smaller deposit and have a smaller mortgage at the outset of the purchase.

Although building societies grow during a period of boom, they have to behave responsibly. It would be wrong to offer mortgages to those who would not be able to afford the repayments over the long term. Building societies are therefore careful about who they lend to. Building societies take this responsibility seriously as too much debt could destabilise their balance of savings and lending.

A period of boom does not last forever. During this period it becomes difficult to sustain growth. The demand for goods and services simply outstrips the ability of all of the businesses within the economy to supply all of the goods and services that consumers would like. This is known as overheating - inflation accelerates and the government may intervene by increasing taxes or interest rates. Growth slows and a downturn begins to take place.

Building Societies Association | Working within the business cycle