Would an increase in UK base rates decimate the UK property market?

Would an increase in UK base rates decimate the UK property market?

Would an increase in UK base rates decimate the UK property market?

It seems to be a daily discussion, whether or not the Bank of England will increase UK base rates in the short to medium term and if so by how much. You could in many ways argue that the Bank of England is giving mixed signals at the moment because one day it seems as though an interest rate rise is imminent only for these hopes to be dashed. The fact remains that UK base rates will likely rise at some point during 2014 but what kind of impact would this have on the UK property market?

Before we look at the potential impact an increase in base rates would have on the UK property market, it is difficult to see why the Bank of England is questioning rising property prices although unwilling or unable, as yet, to use the most direct tool available to them, an increase in base rates.

Cheap finance fuels property boom

While UK base rates remain at historic lows it is not difficult to see why the UK property market might seem attractive to investors looking for short to medium term opportunities. The chance to use relatively cheap finance to acquire properties which may offer yields anywhere from 4% at the luxury end of the market to in excess of 10% for those offering limited capital growth but steady rental income is very attractive to many investors.

Quote from PropertyForum.com : “Are clever investors turning net sellers of UK property?”

The opportunity to acquire UK property probably looks even more attractive when you take into account the minimal interest rates available on savings accounts at this point in the cycle. The ability to lock in rental yields which could be in excess of 10% therefore allows your capital to effectively grow at a faster rate than inflation. When you compare this to savings accounts which may pay around 1%, with inflation at 3%, in effect your capital is decreasing in real terms year-on-year.

Would a rise in UK base rates rock the property market?

To a certain extent the UK property market, and UK financial markets, are already factoring in an increase in UK base rates by the end of 2014. This may only emerge as a quarter percent rise but it will signal the end of historically low UK base rates and a turning of the cycle. It would seem fairly obvious that as and when the cost of finance in the UK increases this will have a double impact upon the UK property market. The cost of finance will increase while at the same time those who may have been looking for alternative homes for their savings, which currently attract little in the way of interest, may begin to move away from the property market to other areas of the financial arena offering better value.

The whole idea of an increase in UK base rates will need to be critically timed to ensure that it does not cut off the ongoing UK economic recovery with the UK one of the leading economies in the world at this moment in time. This is obviously a very fine balancing act for the Bank of England because it will have a potentially enormous impact on not only the property market but the short to medium term performance of the UK economy as a whole. Not a position anybody would wish to be put in!

One Response to “Would an increase in UK base rates decimate the UK property market?”

  1. Will this inflate the housing prices? Very likely. Sellers will be a bit more eager to put their properties on the market and look forward to getting potential buyers rather quickly.

    On the other hand, buyers will have to be wiser and plan things carefully. An increase in base rates will have a massive impact but would not necessarily decimate the market. I think buyers should just be more careful about the mortgage deals they are getting to make sure that they are not badly hurt by the base rate increase.

    For instance, they can still shop around for fixed rate mortgages to help them with their property purchase. And even if the property prices soar as expected, quite a number of decent mortgage deals may ease their worries. Fixed Rate mortgages are going to be ideal. For instance, a mortgage provider can set a fixed interest at 2% for the first few years – be it 3, 5, or 10. Even if there are changes in the BoE’s base rate, they’re still very likely to pay the same rate for a period of time. Only at the end of the fixed rate period will they be shifted into the standard rates that the have agreed with their mortgage lender.

    Will it really take the UK Housing Market down the drain? I believe and certainly hope not. Property ownership, irrespective of how daunting and huge a commitment it is, will always be something the people would want to achieve. Shelter is a necessity, and even if the prices soar due to an increase in base rates, there will be (and I hope there should be) schemes to help consumers afford the best property for them and their families.


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