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No interest rate cut in UK unlikely to affect property market


Image The surprise decision by the Bank of England not to announce a cut in the UK’s already historic low interest rates is unlikely to have much impact on the property market with some experts believing it could boost real estate.

Even if the bank rate had been cut to 0.25% from 0.5% there would have been little room for improvement, according to David Whittaker, managing director of Mortgages for Business, who pointed out that mortgage rates are already at record lows and there is little room for them to go much lower.

‘Inter lender competition has played a significant part in this and with yields on swaps and UK gilts remaining near record lows, mortgage borrowers will continue to benefit from enhanced affordability for some time. Property investors with sound financial planning and a long term outlook are therefore well placed to take advantage of continued generous pricing,’ he said.
 
‘Property prices could be a little bumpy in the short term and the Monetary Policy Committee has highlighted a weakening of activity in the housing market. This might trim some short term capital gains on offer but in the long term, the outlook for investors remains positive. Supply of housing in the UK remains significantly out of sync with demand which will support price increases over coming years. Furthermore, high levels of demand for rental accommodation will provide landlords with strong yields,’ he added.

Lucian Cook, Savills UK head of residential research, explained that the two year fixed rate has already levelled out. ‘We may now see lenders margins edge up. However, this is likely to be no more than a squeeze on affordability for mortgaged home owners, suggesting that what happens to the housing market in the short term will have more to do with sentiment than the cost of debt,’ he said.
 
‘The cost of borrowing will become more important once we see the economic impact of the decision to leave the EU, but for now the Bank still has the option of reducing rates up its sleeve,’ he added.

‘A greater level of political stability following the appointment of the new Prime Minister probably helped to steer the decision to hold interest rates, according to Andrew Burrell, head of forecasting at JLL.

‘This can also be taken as a move to reassure the market that the Bank will not take knee jerk reactions and will remain calm under pressure. The market itself is also operating at low rate levels which may have removed the urgency to cut rates this month,’ he pointed out.

‘Indeed, interest rates continue to soften along the yield curve with most maturities at record lows. A cut shouldn’t be ruled out in August, however, after the market has been given more time to adjust and longer term sentiment is clearer,’ he concluded.

Adam Challis, head of residential research at JLL, pointed out that even if there had been a cut it was unlikely that this would have been passed on by lenders and a rate move could have been perceived as a rush to judgement and may also have sent the wrong signal to the market at this stage.

‘Improved housing market activity supports labour mobility, which may become more important during a period of weaker economic uncertainty. As a result, support for the housing market will remain a key priority for the Bank of England going forward,’ he added.

Meanwhile, Jean Liggett, managing director of property investment consultancy Properties of the World, said that as a result of the decision clients have said they are keen to get on with buying properties.

‘Many say that regardless of a hold in interest rates, they are still losing money in real terms by keeping it in the bank as inflation is higher than the interest they have and will be earning,’ she explained.
 
‘We believe however there will be an interest rate cut following the Bank of England’s next scheduled meeting in three weeks’ time which will result in a further increase in enquiries from both first-time buyers and new and experienced investors alike,’ she said.

The firm has also been seeing an increase in enquiries for commercial properties after the Referendum. ‘In an uncertain market following the Brexit vote, investors like the fact that hotels, student accommodation and care homes offer fixed returns of five or more years and the return is over twice what they would get from most residential buy to lets,’ she explained.
 
‘In the current climate where buyers feel greater uncertainty, fixed returns offer peace of mind and mitigate risk. Buyers know for example that they will get a circa 8% return year in and year out with a care home, student accommodation or hotel room compared to residential buy to let where the returns are not fixed and hence could fluctuate greatly year on year,’ she added.

According to Ben Madden, managing director of the London estate agents Thorgills, no change in the base rate may give the property market more of a boost than if the Bank had cut.
 
‘It’s by no means business as usual in the property market but for rates to remain unchanged suggests the Bank of England believes there is no reason to panic. For the time being anyway. An August cut is still very possible but the Bank of England has clearly decided the appointment of Theresa May has brought in a degree of political stability that simply wasn’t there a week ago,’ he said.

‘On the ground, we are not seeing panic in the property market. In fact, since the EU referendum result came in, there has been a small spike in new sales instructions and an increase in buyer registrations. The implosion of the property market simply hasn’t materialised. People have to get on with their lives and whatever happens, it’s now almost certain that interest rates will stay very low for the foreseeable future,’ he concluded.

Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA), pointed out that regulation of the mortgage market would hold back any improvements in accessibility for first time buyers, even if rates were to fall further.

‘The Basel capital rules mean lenders will continue to have to stress test borrowers at 3% above prevailing rates, ensuring they could still afford repayments were the economic environment to change. Leaving Europe will have no impact on these requirements as they are a global banking standard,’ he explained.

‘Adding to this, any base rate cut would likely have a limited effect on borrowing rates, with the current trends showing borrowers are mainly opting for fixed rate deals. These are priced off the swap curve, meaning lower rates in the short term are already factored-in. Remortgaging will likely rise but first time buyers’ fortunes will be largely unchanged,’ he added.

 

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BDC 318 : Jul 2024