Earlier this week Mark Carney, the Governor of the Bank of England, confirmed that UK base rates are unlikely to increase prior to the election in 2015. There was a slight caveat in that if UK unemployment fell from 7.8% to 7%, the bank would look again, but in the current economic environment this is unlikely. So effectively Mark Carney has fixed UK base rates at 0.5% until potentially 2016.
While much of the focus has been upon reigniting the UK economy and assisting the property sector, many UK savers have been left behind with minimal interest rates which, when taking into account inflation, mean that their savings are actually reducing in real terms. So will savers in the UK look to switch to property investments in the short term?
The UK property market
While yields on UK properties are far in excess of yields available on UK savings accounts there is risk to capital when joining the UK property party this far down the line. The fact that UK base rates are unlikely to move before 2016 does give a guarantee of cheap finance for the foreseeable future which together with the UK government’s Help to Buy initiative gives incredible support to the sector. There are signs that some areas of the UK property market are beginning to overheat but if the UK economy recovers in the short to medium term, however unlikely this may be, it could help to reduce the overvalued look appearing in some areas.
Quote from PropertyForum.com : “The indications have been there some time, the UK property market is very much back in vogue and investors seem to be happy pushing prices higher and higher in the short term.”
It is debatable as to whether there is any significant upside in the short to medium term for UK property, some will suggest there is still more upside while others believe prices are being artificially supported. Therefore those looking to transfer their savings into property assets would be taking some risk with regards to their capital even if this is being slightly offset by rental yields available.
UK savers pay the price
It is ironic that UK savers are paying the price for the UK economic downturn and those who have racked up debts over the years are receiving most assistance from the UK government. This ongoing support of the UK property sector is dragging more and more people out of negative equity, perhaps people who overstretched themselves when UK property pushed too far ahead at the turn of the century.
This situation is having a life changing impact upon pensioners who are being forced to live off their savings, with UK benefits still under pressure, despite the fact that their capital is depreciating in real terms when taking into account inflation. Quite how long savers should be expected to pay the price for the U.K.’s period of excess spending is debatable but the longer this drags on the more harm it is doing to those who have saved for a rainy day.
On the surface it may look an interesting opportunity to switch your savings, which are probably earning negligible interest, into the property sector. Many believe there is potential for further capital growth, property yields are in excess of those available for savers but it is vital that those in this situation are aware of the danger to their capital.
The UK property market cannot continue to rise and rise for ever and a day, especially taking into account the current economic climate, and while it is unlikely we will see a property crash in the foreseeable future, perhaps the rate of growth in property prices will subside?