Interest rate rise: property market reaction

Yesterday (02/11/17), interest rates saw an increase for the first time in ten years, seeing a rise of 0.25% and reversing the interest rate cut last year.

The anticipated impact on the property market was thought to be minimal, and post the decision of the Monetary Policy Committee, this stance seems relatively unchanged.

Taking this view was James Roberts. The chief economist at Knight Frank stated: “An increase in the base rate is often viewed with trepidation by the property industry, but this long expected move is unlikely to have a negative impact. For commercial property, it should be remembered that debt has played far less of a role in the market in recent years than was the case prior to the financial crisis. Commercial property yields are not strongly correlated to interest rates, so I do not see a small rate increase having much of an impact.”

Also sharing this stance was Addington Capital’s, Martin Roberts. He stated that even if the increase was to be more significant, it’s impact would be minimal.

“Going up by 0.25% won’t make any difference at all. I don’t think that another increase would be likely anytime soon after that and when they do start to rise, even if they go to 3%, it is still less than half the long term average and so still not a big issue.”

However, not everyone thought that the effect of the change would be quite so small. Jonathan Loynes, the chief economist at Capital Economics acknowledged that whilst many will not see an impact immediately, it could lead to buyer demand remaining relatively unchanged.

“Today’s rise in Bank Rate is likely to be passed on to borrowers in full and in fairly short order. Admittedly, thanks to the popularity of fixed rate mortgages in recent years, many borrowers will not see an immediate rise in their monthly payments. Even so, a rise in the cost of borrowing is another reason to expect buyer enquiries and mortgage approvals to stay in the doldrums for some time yet.”

Also commenting on the influence that the change could have on consumer demand was David Westgate. The group chief executive at Andrews Property Group stated that although it may be an appropriate time for rates to rise, it’s important that steps to retain consumer confidence are implemented.

“In the aftermath of the financial crisis, it made sense that rates should be kept low in order to drive activity in the market. That was, however, ten years ago and the time is now right to start readdressing rates.

“Given that this is a relatively small increase in the base rate, its impact to most borrowers should be nominal and, assuming they have planned appropriately, relatively easy to adapt to.

“What the industry needs to ensure, however, is that it works to stem any knock to confidence amongst consumers that this announcement brings.

“Simply hearing news of a rate increase will lead some people to reconsider their financial and property decisions, and whilst this is understandable in some respects, these decisions should only ever be made based on personal circumstances and with at least a medium- if not long-term view.

“When taken in this context, the rate increase should not have any impact on the property market.”

Others within the industry have considered the potential effect on rents, especially following the recent regulatory changes that landlords have been subject to. CEO and founder of Landbay, John Goodall stated: “The first rate rise in a decade could fire the starting gun for an increase in residential rents. Landlords have had to face a catalogue of challenges over the past couple of years, from stricter regulation, reductions to tax relief, and a significant stamp duty tax hike when buying a buy-to-let property. Many expected these would be passed on to tenants, but low mortgage rates have enabled landlords to absorb much of these costs, especially those that are wary of tenants facing negative net wage growth, so a base rate rise could make all the difference.”

However, it seems that there may be more concern relating to other areas of the property market, as was expressed by the chief executive of haart, Paul Smith.

He stated: “With more stringent borrowing criteria in place we do not see very small increases in interest rates as being a significant impediment to the market. But this rise does show that rates could nudge up in future.

“A far bigger threat to the stability and health of the housing market is the punitive levels of Stamp Duty which the Chancellor should address as a top priority in his budget later this month.”


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