Over the last few months there has been major concern regarding the flow of funding to the UK mortgage market that has impacted on property prices and the demand for UK property. However, yesterday’s news that the consumer price index has risen to 3.7% from 3.3% in the previous month is a major shot across the bows of the UK government and the Bank of England. Depending upon which inflationary figure you use, with the consumer price index seen by many to best reflect the underlying market movement, there is no doubt that the cost of living is moving higher in the UK. So how will this impact upon the UK property market?
There are a number of factors to consider with regards to the UK property market which include:
The cost of living
In simple terms, the higher the cost of living in the UK the less funding available for property purchases and mortgage arrangements. The 3.7% annualized consumer price index figure has shocked some people although many experts believe the figure will push well over 4% in the short to medium term. When you also take into account the fact that funding is for many people, even just for credit cards and bank loans, not available at the moment this places major pressure upon the UK mortgage market.
Unemployment is also rising which is also placing more pressure on household budgets with many people now looking to err on the side of caution in the short term to see whether their positions at work are secure. These factors together immediately reduce the amount of funding available in the average UK household to cover future payments such as mortgages, etc.
Over the last few weeks it has become apparent that more and more mortgage companies in the UK are looking to take into account various elements of the cost of living that have for many years been ignored. It is believed items such as for example membership of a gym will count against your projected mortgage figure because this is seen as another expenditure which means less “free income” to cover future mortgage payments. It is also becoming obvious that more people in the UK are falling into financial disarray and negative marks on your credit rating will impact upon your ability to complete a mortgage application and the potential mortgage interest rate.
Despite the fact that banks around the UK have promised the UK government that they will increase their mortgage funding in the short to medium term there is no evidence of this at the moment and banks appear to be erring on the side of caution rather than investing for the future.
The easiest way to combat any potential rise in the cost of living, i.e. inflation, is to increase UK base rates, which effectively strangles the availability of finance for many people thereby reducing disposable income and reducing pressure on prices. However, many people are already on the verge of significant financial problems and an increase in UK base rates, which would not only increase mortgage rates but also credit card and loan rates, could push many people over the edge. There is also the fact that an increase in UK base rates will be reflected in the underlying money markets which will also mean more expensive credit for UK banks which use this particular route.
It seems inevitable that UK base rates will rise at some point despite opposition parties claiming an increase in UK base rates would push many people into the financial abyss. However, the Bank of England appears to be reluctant to increase base rates at this point in time to try and safeguard the future of UK consumers and in particular the UK property market.
There is no doubt that the UK property market, the UK inflation and the cost of living will be grabbing the headlines for many months to come in the UK. Any increase in the cost of living, set against a reduction in the employment number and potential reductions in take-home pay, will squeeze literally hundreds of thousands if not millions of households in the UK. The Bank of England, which for many months now has been ignoring the threat of inflation, is now at a very critical stage of the UK recovery program.
If Mervyn King and his colleagues decide not to increase UK base rates this will inevitably feed the monster that is inflation and increase the cost of living in the UK. However, if UK base rates are increased then this will reduce the credit available across the UK, increase credit card, loan and other finance repayments as well as having a direct negative impact upon the UK property market. The more people struggling to repay their mortgages in the future will inevitably lead to more houses for sale that will soften prices and make a very difficult situation even worse.
Over the last couple of years the main threat to the UK economy, and the UK property market, appears to have been the lack of liquidity offered by UK banks and financial institutions. However, as UK inflation moves ahead and looks likely to settle at over 4% in the short to medium term, the cost of living in the UK is outstripping any increases in household incomes. Indeed, a number of homes in the UK are struggling to retain their employment income in the short to medium term with enormous job losses in the public sector and more job losses expected in the private sector.
While it is too early to sound the death knell for the UK economy there is no doubt that we are at a very critical stage of the UK recovery program and the coalition government will need to “pull a number of rabbits out of the hat” to get us back on track in the short to medium term. If property prices do fall, as many are predicting, they will eventually reach a level when investors will return, and a base will be created, but where and when this will happen is anybody’s guess at this point in time.