How Will a Reduction in Interest Rates Impact the UK Property Market?
Major central banking institutions have begun to slash their base interest rates to stimulate growth as global economies attempt to fight the impact of the coronavirus.
Not many could have predicted rates would be cut further in the UK after almost a decade at rock-bottom levels.
Many will want to know the reduced interest rates will have on the property market in the UK and understand who are the winners and who are the losers of any upcoming changes.
Central Banking Institutions Take Action
The fear that coronavirus will create a long lasting global economic slump have led the central banking systems to act to counter this potential threat.
In the last few weeks the US federal reserve, Central Bank of Malaysia, Bank of Canada and Bank of Australia have all cut their interest rates.The Bank of England strongly follows suit slaish its base rate to 0.25%.
Some industry experts had predicting a modest reduction of 0.25%, but the rate was cut by as much as 0.5%. Recent reports from US analysts say that the federal reserve might further reduce its own interest rates to 0% to avoid an economic recession.
The Bank of England will usually set its interest rates at the base rate in order to keep inflation at around 2%. The rate will be set based in response to national and global events and is therefore subject to change by the Monetary Policy Committee (MPC) eight times a year if required.
However, interest rates have remained at 0.75% since August 2018 and have only been increased on two occasions in the last decade.
Andrew Bailey, the newly appointed governor, made it clear that the Bank of England would act very quickly regarding coronavirus spread but warns that limited support is available and the government must provide additional emergency funds to assist small to medium sized businesses.
Property Market and the Wealth Effect
As interest rates are reduced and lending is encouraged the knock-on effect is generally an increase in property prices, much welcomed result of any cuts.
When interest rates are low the amount of money that a person can borrow is based on what they can afford to pay back. An interest rate cut increases their borrowing power. In turn, people will spend more on their homes. With a limited supply of homes this tends to drive up the property prices.
The Bank of England has declared this effect as the sole reason that property prices have soared in recent years. In the mid-term another interest rate reduction will likely cause the average property price to creep upwards further. A benefit for existing homeowners but a negative impact to those that may be looking to buy in one or two years time.
The percentage of buyers purchasing property in London’s prime real estate market with a mortgage loan has been reported as 81% as in November 2019, according to research from the estate agent, Hamptons International. This figure is up from 74% on the previous year. The majority of new London buyers will be affected by any base rate changes.
The inevitable rise of house prices that will occur will have a negative impact on first time buyers and new families, a demographic already struggling in the UK housing market. The amount of additional money they can borrow may not cover the additional cost they will be paying for the same property.
The increase in property value may take some time to occur and so buying sooner, with advantageous mortgage rates, may be a strategy for those currently in the market.
Mark Cox, Managing Director at Cox and Co estate agents, explains that the cut in interest rates will provide a lift to the market. However, he warns that for the benefit of the long term health of the real estate market in the UK as a whole we must see a normalisation of these interest rates.
Confidence Building for Property Developers
A sector of the market that is encouraged by potential interest rate cuts are property development firms. Receiving higher prices for newly constructed housing often leads to an increase in the number of development projects.
Equally, the financing of these projects themselves become more appealing as lending money becomes very cheap.
New builds or project renovations of existing property in London’s property market will likely increase as a result of this effect.
Oliver Bernard Private
As the world economy is struggling to deal with an unusual and unforeseen crisis there are a number of reasons why it may now be a good time to make movements in the London prime property market.
Volatility in the stock exchanges mean that many will turn to longer term investment vehicles such as property. The London prime real estate market remains historically one of the most robust and lucrative investment opportunities and may now seem more appealing compared to the unpredictable and erratic global stock market of today's world.
If you are looking to browse the prime real estate market in London then delve into our industry leading Showcase collection. Our property Showcases provide the ability to walk through and appreciate the exact feel and character of a property, all from your mobile or desktop device.