Has the Bank of England lost sight of the UK economy?

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Mark Carney, the Governor of the Bank of England, could become the first to serve a full term without adjusting interest rates since Lord Thomas back in 1949. When you bear in mind that just a few months ago Mark Carney suggested it was “inevitable” that UK base rates would rise in the short term, it is no surprise to learn the city is losing faith. Over the last two years we have seen a number of false dawns regarding an increase in UK base rates with many property investors rushing to lock in historically low interest rates.

Is there more cheap finance to follow?

The latest inflation report from the Bank of England suggests that UK base rates will not increase until at least August 2018. Even though there are factors outside of the control of the Bank of England let’s not forget that Mark Carney has gone out on a limb on numerous occasions to promote his view of the UK economy. Indeed, the latest inflation report includes a reduction in UK growth forecasts and low inflation for the foreseeable future.

At a time when many believe the UK property market is becoming overextended this growing period of low finance costs is likely to feed further demand for UK property. So, what can the authorities do in order to regain control of the UK property market?

Market forces

While continued cheap finance will help to feed the UK property market it is worth noting that the supply of suitable properties is drying up. Therefore, even if the current rate of would-be buyers was maintained this would still place yet more upward pressure on UK property prices due to fewer properties available. In some ways UK property investors will need to radically adjust historic benchmarks and potentially “pay over the odds” to gain a foothold in the marketplace.

At this moment in time it seems that whatever the UK government throws at the UK property market, investors find a way to live with it. We saw an increase in stamp duty, significant tax adjustments for foreign investors and the buy to let environment is also changing. However, demand for UK property is still relatively high although much of this could be due to the so-called “safe haven status” many have now afforded the UK.

Storing up trouble?

There are serious concerns that relatively low finance costs are allowing investors to purchase properties which would normally be out of their price range. While they may well be able to afford loan repayments at current interest rates what will happen when rates finally increase?

Far too many property investors are not looking too far ahead and seem to be ignoring the inevitable increase in finance costs. Whether they will be looking to crystallise any capital gains prior to the increase in financing cost remains to be seen but if this is the case then they are playing a potentially dangerous game. On one hand the UK economy is slowing while on the other house prices are likely to be squeezed even higher in the short to medium term.

What about the long-term outlook? Well, that is a whole new ballgame…………

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