Bank of England Governor Mark Carney today gave a press conference after the Bank of England’s latest MPC (Monetary Policy Committee) meeting. Despite the fact that he had been hinting heavily for some time that UK-based rates would rise sooner rather than later there was a vote 8 to 1 in favour of retaining base rates at 0.5%. This immediately led to pressure on sterling as many had expected an increase in base rates at the latest in the early part of 2016.
What does this mean for the UK property market and why is the Bank of England so reluctant to increase base rates from their historic low?
Slowing economic growth
The last couple of UK economic reports have indicated a slowing in the UK economy although it is still set to grow in 2015 and 2016. While traditionally the UK property market is heavily linked to the UK economy this link is perhaps not as strong as it has been due to an array of extenuating circumstances. It is also worth noting at this point that the Bank of England has reduced its short-term inflation forecast although the two-year expectation remains intact.
This has put the Bank of England in something of a quandary because there is a 50% chance that UK inflation will overshoot the Bank of England’s target within two years. Ideally, this is the time when the Bank would increase base rates to make borrowing more expensive and reduce spending. However, a slowing in the UK economy and challenges in areas such as China make further reductions in forecast UK economic growth more likely than upside revisions.
There are concerns that property investors and the general UK public are using these historic low base rates to take on debt which in normal markets may not have been as affordable. In some ways this is being financed by a gradual increase in household income, with wage inflation finally turning positive, but it would be a very different picture for many people as and when UK base rates move higher.
As we touched on earlier in the week, recent forecasts suggest that the average rental yield in the UK is around 5% and UK property prices are expected to increase by a similar amount during 2015. This equates to a combined income of around 10% with the likelihood that rental demand will increase as buy to let supply struggles to keep pace. At this rate of return it is likely that more investors will look towards property, assuming they have the finances available, offering a backbone to the UK property market in the foreseeable future.
Some critics are suggesting that Mark Carney has damaged his reputation with his willingness to go out on a limb with regular forecasts about the UK economy and potential base rate changes. The economic situation in the UK, and indeed in many other areas of the world, has been challenging to say the least and unfortunately some of his forecasts have proved either overoptimistic or over pessimistic.
It is worth noting that these forecasts are given in good faith at the time, taking into account not only the Bank of England’s economic indicators but also those from other professionals. Whether or not he will be as keen to give so many forecasts in the future remains to be seen.